HFJ23S 


MATERIALS  FOR  THE  STUDY 
OF  BUSINESS 


Materials  for  the  Study  of  Business 


Industrial  Society.  By  Leon  C.  Marshall.  xxiv-fl,082  pages, 
royal  8vo,  cloth. 

Financial  Organization  of  Society.  By  H.  G.  Moulton.  xxii+790 
pages,  crown  8vo,  cloth. 

Principles  of  Accounting.  By  Albert  C.  Hodge  and  J.  O.  McKinsey. 
xiv+390  pages,  8vo,  cloth. 

Law  an  J  Business.     By  William  H.  Spencer. 

Vol.  I.  Introduction  to  Law  and  Business,  xviii-j-612 
pages,  8vo,  cloth. 

Vol.  II.  Law  and  the  Market.  Law  and  Finance.  xviii+ 
670  pages,  8vo,  cloth. 

Vol.  III.  Law  and  Labor.  Law  and  Risk-Bearing.  Law 
and  the  Form  of  the  Business  Unit,  xviii+654 
pages,  8vo,  cloth. 

Business  Administration.  By  Leon  C.  Marshall,  xxiv+920  pages, 
8vo,  cloth. 

Social  Studies  in  Secondary  Schools.  By  a  Commission  of  the 
Association  of  Collegiate  Schools  of  Business,  x-f-114 
pages,  12mo,  boards. 


IN  PREPARATION 

Business  Communication.  The    Worker  in    Our   Economic 

Risks  and  Risk-Bearing.  Society. 

The    Manager's    Administration 
Managerial  Accounting.  of  Labor. 

Bank  Management.  The  Social  Control  of  Business 

Commercial  Cost- Accounting.  Activities. 

Government  and  Business. 

I  he    Managers   Administration       ^.i       D,     .     ,     c     .  .      f 

,  ,-.  T he    Physical    Environment    of 

of  Finance.  Business. 

The  Place  of  the  Market  in  Our  Traffic  and  Transportation. 

Economic  Society.  The  Psychology  of  Business  Pro- 
Trie    Manager's   Administration  cedure. 

of  the  Market.  Education  for  Business 


THE  UNIVERSITY  OF  CHICAGO  PRESS 
CHICAGO,  ILLINOIS 


LAW  AND  BUSINESS 


THE  UNIVERSITY  OF  CHICAGO  PRESS 
CHICAGO,  ILLINOIS 


THE  BAKER  &  TAYLOE  COMPANY 

NEW  YORK 

THE  CAMBRIDGE  UNIVERSITY  PRESS 

LONDON 

THE  MARUZEN-KABUSHIKI-KAISHA 

TOKYO,  OSAKA,  KYOTO,  FTJKUOKA,  SEND A I 

THE  MISSION  BOOK  COMPANY 

SHANGHAI 


LAW  AND  BUSINESS 


VOLUME  III 

LAW  AND  RISK-BEARING 
LAW  AND  LABOR 

LAW  AND  THE  FORM  OF  THE 
BUSINESS  UNIT 

BY 
WILLIAM  H.  SPENCER 


THE  UNIVERSITY  OF  CHICAGO  PRESS 
CHICAGO,  ILLINOIS 


COPYRIGHT  1922  BY 
THE  UNIVERSITY  OF  CHICAGO 


All  Rights  Reserved 


Published  May  1922 


Composed  and  Printed  By 

The  University  of  Chicago  Press 

Chicago.  Illinois,  U.S.A. 


EDITOR'S  PREFACE 

Collegiate  training  for  business  administration  is  now  so  widely 
attempted  that  the  time  has  arrived  when  experiments  should  be 
conducted  looking  toward  the  organization  of  the  business  curriculum 
into  a  coherent  whole.  Training  in  scattered  " business  subjects" 
was  defensible  enough  in  the  earlier  days  of  collegiate  business  training, 
but  such  a  method  cannot  be  permanent.  It  must  yield  to  a  more 
comprehensive  organization. 

There  can  be  no  doubt  that  many  experiments  will  be  conducted 
looking  toward  this  goal;  they  are,  indeed,  already  under  way.  This 
series,  "Materials  for  the  Study  of  Business,"  marks  one  stage  in  such 
an  experiment  in  the  School  of  Commerce  and  Administration  of  the 
University  of  Chicago. 

It  is  appropriate  that  the  hypotheses  on  which  this  experiment  is 
being  conducted  be  set  forth.  In  general  terms  the  reasoning  back 
of  the  experiment  runs  as  follows :  The  business  executive  administers 
his  business  under  conditions  imposed  by  his  environment,  both 
physical  and  social.  The  student  should  accordingly  have  an  under- 
standing of  the  physical  environment.  This  justifies  attention  to 
the  earth  sciences.  He  should  also  have  an  understanding  of  the 
social  environment  and  must  accordingly  give  attention  to  civics,  law, 
economics,  social  psychology,  and  other  branches  of  the  social  sciences . 
His  knowledge  of  environment  should  not  be  too  abstract  in  character. 
It  should  be  given  practical  content,  and  should  be  closely  related  to 
his  knowledge  of  the  internal  problems  of  management.  This  may  be 
accomplished  through  a  range  of  courses  dealing  with  business  admin- 
istration wherein  the  student  may  become  acquainted  with  such  mat- 
ters as  the  measuring  aids  of  control,  the  communicating  aids  of 
control,  organization  policies  and  methods;  the  manager's  relation 
to  production,  to  labor,  to  finance,  to  technology,  to  risk-bearing  f 
to  the  market,  to  social  control,  etc.  Business  is,  after  all,  a  pecuni- 
arily organized  scheme  of  gratifying  human  wants,  and,  properly 
understood,  falls  little  short  of  being  as  broad,  as  inclusive,  as  life 
itself  in  its  motives,  aspirations,  and  social  obligations.  It  falls 
little  short  of  being  as  broad  as  all  science  in  its  technique.  Training 

vii 


/<*>/ 


Vlll 


EDITOR'S  PREFACE 


BASIC  ELEMENTS  OF  THE  BUSINESS  CURRICULUM 


Of  problems  of   adjustment   to 
physical  environment 

a)  The  earth  sciences 

b)  The  manager's  relationship 
to  these 

Of  problems  of  technology 

a)  Physics  through  mechanics, 
basic,    and    other    sciences 
as  appropriate 

b)  The  manager's  administra- 
tion of  production 

Of  problems  of  finance 

a)  The  financial   organization 
of  society 

b)  The     manager's     adminis- 
tration of  finance 

Of  problems  connected  with  the 
market 

a)  Market  functions  and  mar- 
ket structure 

b)  The  manager's  administra- 
tion of  marketing  (including 
purchasing  and  traffic) 


CONTROL 

1.  Communicating  aids  of  control, 

for  example 

a)  English 

b)  Foreign  language 

2.  Measuring  aids  of  control,  for 

example 

a)  Mathematics 

b)  Statistics  and  accounting 

3.  Standards  and  practices  of  con- 

trol 

a)  Psychology 

b)  Organization    policies    and 
methods 


Of  problems   of   risk   and   risk- 
bearing 

a)  The  risk  aspects  of  modern 
industrial  society 

b)  The  manager's  administra- 
tion of  risk-bearing 

Of  problems  of  personnel 

a)  The  position  of  the  worker 
in  modern  industrial  society 

b)  The  manager's  administra- 
tion of  personnel 

Of   problems   of   adjustment   to 
social  environment 

a)  The  historical  background 

b)  The    socio-economic    insti- 
tutional life 

c)  Business  law  and   govern- 
ment 


EDITOR'S  PREFACE  IX 

for  the  task  of  the  business  administrator  must  have  breadth  and 
depth  comparable  with  those  of  the  task. 

Stating  the  matter  in  another  way,  the  modern  business  admin- 
istrator is  essentially  a  solver  of  business  problems — problems  of  busi-. 
ness  policy,  of  organization,  and  of  operation.  These  problems,  great 
in  number  and  broad  in  scope,  divide  themselves  into  certain  type 
groups,  and  in  each  type  group  there  are  certain  classes  of  obstacles 
to  be  overcome,  as  well  as  certain  aids,  or  materials  of  solution. 

If  these  problems  are  arranged  (i)  to  show  the  significance  of  the 
organizing  and  administrative,  or  control,  activities  of  the  modern 
responsible  manager,  and  (2)  to  indicate  appropriate  fields  of  train- 
ing, the  diagram  on  the  opposite  page  (which  disregards  much  over- 
lapping and  interacting)  results.  It  sets  forth  the  present  hypothesis 
of  the  School  of  Commerce  and  Administration  concerning  the  basic 
elements  of  the  business  curriculum,  covering  both  secondary  school 
and  collegiate  work. 

These  present  volumes  on  Law  and  Business  deal  with  one  phase 
of  the  relationship  of  the  business  administrator  to  his  social  environ- 
ment. 

L.  C.  MARSHALL 


AUTHOR'S  PREFACE 

These  materials  on  Law  and  Business,  presented  in  three  volumes, 
are  intended  primarily  for  use  in  schools  of  business.  They  are  pre- 
pared to  serve  as  a  basis  of  instruction  in  the  legal  aspects  of  business 
and  are  a  part  of  a  general  collection  of  materials  for  the  study  of 
business.  It  is  hoped,  however,  that  they  may  be  serviceable  also  to 
departments  of  political  science  and  political  economy. 

In  attempting  to  fit  these  materials  into  a  coherent  program  of 
business  education,  I  have  kept  in  mind  certain  definite  objectives 
which,  in  my  opinion,  should  be  sought  for  in  the  teaching  of  law  in 
schools  of  business.  These  objectives  have  been  worked  out  in  terms 
of  purposes  and  aims  of  business  education  in  general. 

Whatever  else  a  school  of  business  may  have  ambitions  to  do,  it 
is  now  coming  generally  to  be  agreed  that  its  most  appropriate  task 
is  to  instruct  its  students  in  the  fundamental  principles  of  business 
administration.  In  the  nature  of  things,  a  school  of  business  can  do 
little  or  nothing  in  the  technical  aspects  of  business,  because  these 
aspects  vary  so  greatly  in  different  business  activities.  It  can 
accomplish  only  slightly  more  in  giving  instruction  in  the  administra- 
tion of  particular  businesses.  But  underlying  all  forms  of  business 
activities  there  are  certain  fundamental  principles  of  administration 
and  management  and  it  is  to  this  field  that  the  school  of  business  must, 
for  the  most  part,  confine  its  activities.  Effort  has  been  made  to 
present  this  point  of  view  in  the  preparation  of  these  materials  on 
Law  and  Business. 

This  collection  of  materials  is  presented  on  the  theory  that  a 
thorough  study  of  them  will  assist  the  future  business  man  in  the 
administration  of  his  business.  A  business  man,  for  instance,  should 
know  something  of  accounting,  not  because  he  is  going  to  be  an 
accountant,  but  because  he  will  not  understand  his  business  without 
a  knowledge  of  it.  Accounting  is  a  form  of  control  and  a  knowledge 
of  it  is  an  aid  to  administration.  A  business  man  should  know  some 
law,  not  because  he  is  going  to  be  a  lawyer,  but  simply  because  he 
must  have  some  appreciation  of  his  relation  to  organized  society  in 
order  to  carry  on  his  business  intelligently  and  successfully.  Law, 


Xll  AUTHOR'S  PREFACE 

too,  is  a  form  of  control  and  a  knowledge  of  it  is  an  aid  to  adminis- 
tration. 

Speaking  in  general  terms,  the  real  purpose  of  teaching  law  in  a 
school  is,  or  should  be,  to  bring  to  the  future  business  man  a  certain 
awareness  of  the  larger  problem  of  social  control.  Whether  he  likes 
it  or  not,  he  must  play  the  game  according  to  the  rules.  He  must 
therefore  be  brought  to  a  realization  that  one  of  the  conditions  of 
carrying  on  business  in  our  present  economic  order  is  that  he  submit 
himself  and  his  business  to  the  control  of  society.  Law  is  one  of  the 
most  important  instrumentalities  of  social  control  and  it  is  for  this 
reason  that  students  preparing  for  business  should  be  given  instruction 
in  it. 

More  specifically,  there  are  several  objectives  which  should  be 
reached  by  a  proper  presentation  of  these  materials,  (i)  This  study 
should  introduce  the  student  to  the  whole  field  of  the  law,  give  him  a 
working  knowledge  of  legal  phraseology,  and  prepare  him  for  the 
study  of  case  material.  (2)  It  should  assist  him  in  visualizing  more 
clearly  the  structure  of  modern  society,  by  showing  him  the  part  which 
law  and  legal  institutions  have  played  in  its  development.  (3)  The 
study  should  give  the  student  a  practical  knowledge  of  the  legal 
devices  which  business  men  use  in  the  administration  of  their  affairs. 
(4)  It  should  give  him  an  appreciation  of  certain  portions  of  the  law 
which  directly  and  intimately  throw  around  him  the  lines  of  social 
control.  These  rules  of  law,  commanding  this,  prohibiting  that,  and 
permitting  the  other,  are  important  because  they  mark  out  definite 
limits  within  which  business  men  must  formulate  their  policies.  (5) 
It  would  seem  not  too  much  to  hope  that  upon  the  completion  of  the 
study  of  these  materials  the  student  will  have  become  fairly  skilful 
in  analyzing  court  decisions.  This  desideratum,  if  realized,  should 
prove  to  be  of  the  greatest  value  to  the  future  business  man.  The 
power  to  analyze  a  court  decision  will  not  only  open  up  and  make 
available  for  him  the  whole  field  of  reported  cases  but  will  also  give  him 
a  certain  mental  outlook  and  resiliency  which  will  aid  him  in  adjusting 
himself  to  his  social  environment. 

An  arrangement,  different  from  the  orthodox  arrangement  of 
materials  for  the  study  of  law,  has  been  adopted  in  the  preparation 
of  these  materials.  This  has  been  done  consciously  with  the  convic- 
tion that  if  the  teaching  of  law  is  to  justify  its  place  in  the  curriculum 
of  the  school  of  business  it  must  be  less  and  less  law  after  the  tradi- 
tional order  and  more  and  more  business  after  the  modern  view.  If  the 


AUTHOR'S  PREFACE  xiii 

key  word  of  business  education  is  administration,  and  if  the  purpose 
of  teaching  law  to  the  business  student  is  to  assist  him  in  mastering 
the  principles  of  administration,  then  it  would  seem  that  the  law  for 
him,  at  least,  should  be  worked  out  in  terms  of  functions,  relations,  or 
problems  of  the  business  man,  and  not  in  terms  of  the  order  in 
which  the  law  has  developed.  The  arrangement,  therefore,  of  the 
content  of  these  materials  on  Law  and  Business  has  been  made  on  a 
functional  basis — in  terms  of  business  problems  or  relations,  as  far 
as  this  has  been  possible  and  feasible. 

The  functional  materials  have  been  preceded  by  introductory 
materials  to  which  the  first  volume  is  devoted.  The  purpose  of  these 
is:  first,  to  introduce  the  student  to  the  whole  field  of  the  law  by 
giving  him  a  certain  background  of  jurisprudence,  a  working  knowl- 
edge of  how  rights  are  enforced,  and  some  appreciation  of  the  analysis 
of  cases;  second,  to  furnish  the  student  with  fundamental  legal  con- 
cepts from  persons,  torts,  contracts,  agency,  and  property,  in  prepara- 
tion for  the  study  of  the  functional  materials  which  follow  in  later 
volumes;  and  third,  incidentally  to  give  him  an  appreciation  of  the 
place  which  law  occupies  in  the  'structure  of  modern  society.  These 
materials  are,  as  their  name  implies,  an  introduction  to  the  study  of 
Law  and  Business. 

The  materials  which  follow  the  Introduction  are  worked  out  in 
terms  of  the  various  relations  or  functions  which  seem  typically 
characteristic  of  all  forms  of  business.  The  first  division  of  these 
materials  deals  with  the  law  as  it  affects  the  business  man's  relation 
to  his  market.  What  are  the  legal  devices  which  a  business  man  may 
resort  to  in  the  administration  of  his  market  activities?  What  are 
the  legal  limitations  on  the  choice  of  his  market  policies  and  practices  ? 
The  second  division  treats  of  the  legal  problems  involved  in  the  admin- 
istration of  the  business  man's  finances.  What  are  the  legal  devices 
which  assist  him  in  getting  money  and  credit  ?  What  are  the  legal 
devices  for  securing  creditors?  What  are  the  remedies  of  creditors 
against  their  debtors  ?  The  third  division  deals  with  the  law  relating 
to  risk-bearing  as  a  function  in  business.  To  what  extent  does  the 
law  sanction  the  shifting  of  risks  ?  What  devices  does  the  law  furnish 
for  the  shifting  of  risks?  The  fourth  division  deals  with  the  legal 
aspects  of  the  business  man's  relation  to  his  labor.  What  are  the 
outstanding  characteristics  of  the  common-law  contract  of  employ- 
ment? What  are  the  rights  of  the  employer  in  competition  with 
rival  employers  for  labor?  What  are  the  rights  of  the  employer  in 


xiv  AUTHOR'S  PREFACE 

competition  with  his  employees  for  terms  of  employment?  How 
have  the  various  problems  been  dealt  with  in  modern  labor  legislation  ? 
The  fifth  division  of  the  materials  deals  with  the  law  relating  to  the 
form  of  the  business  unit.  What  organization  devices  does  the  law 
recognize  and  sanction  ?  What  are  the  characteristics  of  these  various 
organization  devices?  How  are  the  various  organizations  formed, 
dissolved,  and  reorganized  ?  How  are  they  controlled,  externally  and 
internally  ?  How  are  they  financed  ? 

The  first  volume  of  the  materials  on  Law  and  Business  is  devoted  to 
an  Introduction  to  the  study  of  Law  and  Business.  The  materials  in 
the  second  volume  deal  (i)  with  the  legal  aspects  of  the  business  man's 
relation  to  his  market  and  (2)  with  the  legal  aspects  of  the  business 
man's  relation  to  his  finances.  The  materials  in  this,  the  third 
volume,  deal  (i)  with  the  legal  aspects  of  the  business  man's  relation 
to  risk  and  risk-bearing,  (2)  with  the  legal  aspects  of  the  business 
man's  relation  to  his  labor,  and  (3)  with  the  legal  aspects  of  the 
business  man's  relation  to  the  form  of  his  business  unit. 

In  conclusion,  something  should  be  said  concerning  the  methods 
of  instruction  contemplated  in  the  preparation  of  these  materials. 
Perhaps  more  materials  have  been  selected  than  any  school  can 
adequately  consider  in  the  time  allotted  by  the  curriculum  to  the  study 
of  law.  This,  however,  has  been  done  consciously  and  deliberately. 
The  fact  that  excess  material  is  placed  in  the  hands  of  the  student  will 
be  of  distinct  value  even  though  it  cannot  be  treated  in  class  discussion. 
It  will  tend  to  develop  in  him  a  spirit  of  research  which  at  present  is 
sadly  lacking  not  only  in  schools  of  business  but  in  law  schools  as  well. 
Moreover,  this  excess  material  will  afford  teachers  some  latitude  in 
the  choice  of  the  material  which  they  wish  to  use  and  in  the  subject- 
matter  which  they  wish  to  cover. 

It  is  very  strongly  felt  that  the  study  of  law  in  schools  of  business 
should  be  largely  inductive  and  should  be  based  on  case  material  as 
far  as  possible.  Accordingly,  these  materials  are  composed  for  the 
most  part  of  reports  of  leading  cases.  They  have  been  carefully 
selected  with  a  view  both  to  their  pedagogical  qualities  and  to  their 
business  content.  Each  case  has  been  stripped  of  its  nonessential 
features  for  economics  in  time  and  space,  but  not  to  such  an  extent, 
it  is  hoped,  that  the  didactic  character  of  the  case  has  been  dissipated 
in  the  process  of  adaptation. 

Each  case  or  unit  of  material  is  followed  by  a  series  of  questions 
and  problems.  These  are  typically  of  the  following  kind:  (i)  ques- 


AUTHOR'S  PREFACE  XV 

tions  which  serve  to  bring  out  the  technical  aspects  of  the  principal 
case;  (2)  hypothetical  cases  which  are  intended  to  develop  the  doc- 
trine of  the  principal  case;  (3)  hypothetical  cases  which  involve 
corollaries  of  the  principal  case;  (4)  questions  and  cases  which  connect^ 
the  principal  case  with  past  cases  and  anticipate  problems  in  future 
cases;  (5)  exercises  which  encourage  investigation  of  statutory 
changes  in  the  common  law;  and  (6)  exercises  which  encourage 
the  examination  and  drawing  of  forms. 

Definite  and  beneficial  results  should  flow  from  the  use  of  these 
exercises,  questions,  and  cases.  They  will  encourage  the  student  to 
do  collateral  reading  on  portions  of  the  subject  which  are  not  covered 
by  the  materials  and  which  cannot  be  discussed  in  the  classroom. 
Their  use  will  assist  the  student  in  getting  at  the  heart  of  a  case  by 
stimulating  him  to  do  much  of  his  thinking  before  he  comes  to  class. 
The  questions  and  cases  will  serve  as  convenient  devices  for  getting 
problems  quickly  before  the  class  for  discussion.  The  exercises  will 
be  useful  in  directing  the  student  to  investigate  statutory  changes 
and  in  assigning  practical  work. 

I  am  conscious  of  the  many  imperfections  of  the  present  attempt 
to  present  materials  for  the  functional  study  of  law  in  schools  of  busi- 
ness. However,  I  keenly  feel  the  need  of  materials  with  such  an 
approach  and  believe  that  the  present  attempt  is  a  step  in  the  right 
direction,  and  that  for  the  present  they  will  fill  a  growing  need  in 
colleges  and  universities  in  the  study  of  business. 

I  wish  to  take  this  opportunity  of  expressing  my  gratitude  to 
Professor  Herman  Oliphant,  of  the  Law  School  of  Columbia  Univer- 
sity, formerly  of  the  Law  School  of  the  University  of  Chicago,  for  the 
aid  and  advice  which  I  received  from  him  in  the  preparation  of  these 
materials.  My  debt  of  gratitude  to  Dean  L.  C.  Marshall,  of  the 
School  of  Commerce  and  Administration  of  the  University  of  Chicago, 
for  his  help  in  working  out  the  functional  approach  to  the  study  of 
law  in  schools  of  business  is  no  less  great.  I  wish  also  to  express  my 
appreciation  to  Mr.  J.  F.  Christ,  of  the  University  of  Chicago,  for 
his  assistance  in  preparing  these  materials  for  publication. 

W.  H.  SPENCER 
CHICAGO,  ILLINOIS 
April  3,  1922 


TABLE  OF  CONTENTS 
LAW  AND  RISK-BEARING 

PAGE 

CHAPTER   I.    INTRODUCTORY  TOPICS 3 

CHAPTER  II.    DEVICES  FOR  SHIFTING  RISKS 10 

1.  In  General 10 

2.  Speculative  Contracts        13 

3.  Contracts  of  Insurance 22 

a)  In  General 22 

b}  The  Insurable  Interest 26 

c)  Concealment,  Misrepresentation,  and  Fraud      ....  52 

d}  Operation  of  the  Contract  of  Insurance 68 

i.  As  to  Parties 68 

I)  Assignees 68 

II)  Beneficiaries •  .  76 

ii.  As  to  Obligation 86 

I)  The  Risk  Insured  Against      .......  86 

II)  Warranties 102 

III)  Conditions 1 1  r 

IV)  Amount  of  Recovery 129 

e)  Insurer's  Right  of  Subrogation 135 


LAW  AND  LABOR 

CHAPTER   I.    INTRODUCTORY  TOPICS .  145 

CHAPTER  II.    THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  .     .     .  150 

1.  The  Contract  of  Employment 150 

2.  Liability  of  Employer  for  Injuries  to  Employees     .      .      .      .  164 
a)  Under  the  Common  Law 164 

i.  Risks  Assumed  by  the  Employee 164 

ii.  Risks  Not  Assumed  by  the  Employee 181 

6)  Under  Modern  Legislation 190 

i.  In  General 190 

ii.  Compensate  Injuries 204 

CHAPTER  III.    COMPETITIVE  LABOR  PRACTICES 217 


xviii  TABLE  OF  CONTENTS 

LAW  AND  THE  FORM  OF  THE  BUSINESS  UNIT 

PAGE 

CHAPTER     I.    INTRODUCTORY  TOPICS 281 

CHAPTER   II.    NATURE   AND   CHARACTERISTICS   OF  FORMS  OF  THE 

BUSINESS  UNIT 284 

CHAPTER  III.    FORMATION  OF  THE  BUSINESS  UNIT 327 

1.  Promotion  of  the  Unit > 327 

2.  Organization  of  the  Unit 337 

CHAPTER  IV.    FINANCING  THE  BUSINESS  UNIT 369 

1.  In  General '.      .      .      .  360 

2.  Devices  for  Raising  Capital 386 

3.  Inducements  to  Investors 403 

a)  Transferability  of  Interest 403 

b)  Participation  in  Management 412 

c)  Participation  in  Profits 422 

CHAPTER  V.    MANAGEMENT  OF  THE  BUSINESS  UNIT    .     .     .     .     .  43  2 

1.  Keeping  the  Unit  within  Its  Powers 432 

a)  Powers  of  the  Unit 43  2 

b)  Effect  of  Exceeding  Powers 458 

2.  Distribution  of  the  Powers  of  the  Unit 467 

a)  Powers  of  the  Majority 467 

6)  Powers  of  Individual  Members 503 

c)  Powers  of  Representatives 536 

3.  Duties  of  Members  and  Representatives  in  Management        .  545 

CHAPTER     VI.    RESPONSIBILITY  FOR  TORTS  AND  CRIMES       .     .     .  575 

CHAPTER   VII.    ADJUSTMENT  OF  THE  RIGHTS  OF  CREDITORS  ...  589 

CHAPTER  VIII.    DISSOLUTION  OF  THE  BUSINESS  UNIT       .     .     .     .  619 

TABLE  OF  CASES 645 

INDEX 649 


LAW  AND  RISK-BEARING 


CHAPTER  I 
INTRODUCTORY  TOPICS 


Another  of  the  many  important  relations  which  a  business  man 
must  face  in  the  administration  of  his  business  arises  in  connection 
with  the  risks  to  which  he  and  his  business  are  constantly  exposed. 
It  matters  not  how  careful,  far-sighted  or  sagacious  he  is,  it  is  incon- 
ceivable that  he  will  be  able  to  escape  entirely  the  hazards  of  the 
world  and  society  in  the  affairs  of  which  he  is  actively  engaged. 

What  is  the  nature  of  this  phenomenon  which  we  are  calling  a 
risk  ?  It  is  something  which  may  or  may  not  result  in  a  loss  to  one. 
This  something  may  be  the  happening  or  the  non-happening  of  an 
uncertain,  future  event.  The  occurrence  or  non-occurrence  of  the 
event  may  or  may  not  be  foreseeable  from  the  standpoint  of  a  rea- 
sonable person.  The  consequences  of  the  happening  or  non-happen- 
ing may  or  may  not  be  avoidable  by  the  exercise  of  reasonable  care. 
These,  then,  are  the  more  significant  features  of  the  thing  which  we 
are  here  calling  a  risk. 

Some  of  the  risks  to  which  the  business  man  and  his  business  are 
exposed  are  those  arising  from  the  operation  of  natural  causes,  and 
over  which  he  has  relatively  little  control.  As  examples  of  this  class 
of  risks,  we  may  mention  storms,  earthquakes,  and  floods,  which  in  law 
are  usually  referred  to  as  "Acts  of  God"  because  of  their  inevitable 
and  unavoidable  character. 

Another  class  of  risks  has  its  origin  in  the  conduct  and  actions  of 
human  beings.  Some  of  these  arise  out  of  the  natural  weakness  and 
criminal  instincts  of  mankind.  Health,  life,  social  and  economic 
relations,  and  property  are  constantly  menaced  by  the  practices  of 
criminals  and  of  those  criminally  inclined.  Swindlers,  embezzlers, 
thieves,  robbers,  forgers,  incendiaries,  and  murderers  regularly  take 
their  toll  from  the  wealth  of  society. 

Closely  akin  to  the  foregoing  risks  are  those  which  arise  from 
the  negligent  conduct  of  human  beings.  A  man  is  said  to  intend  an 
injurious  result  when  he  foresees,  desires,  and  strives  for  its  consumma- 


4  LAW  AND  BUSINESS 

tion.  He  is  said  to  be  negligent  as  to  an  injurious  result  when  he 
foresees  it  and  yet  proceeds  in  his  course  of  action,  regardless  of 
consequences,  even  though  he  may  hope  and  desire  that  the  injurious 
result  will  not  occur.  Wastage  and  destruction  of  property,  early  and 
premature  deaths,  and  business  failures  are  in  a  very  large  degree  due 
to  the  inherent  indifference  of  mankind  to  foreseeable  consequences. 

Accidental  or  non-negligent  injuries  constitute  yet  another  hu- 
man source  of  risks  to  which  every  person  and  his  affairs  are  subject. 
An  injurious  result  is  said  to  be  accidental  or  non-negligent  when  it 
is  not  reasonably  foreseeable  by  the  actor  at  the  time  he  does  the 
act  which  produces  the  result.  The  difference  between  negligent 
and  non-negligent  conduct,  it  will  be  observed,  is  one  of  degree. 
Whether  a  given  injurious  result  is  to  be  treated  as  negligent  or  acci- 
dental depends  upon  the  standard  of  care  which  the  law  demands  of  the 
actor.  But  however  this  may  be,  the  fact  remains  that  life,  property, 
and  social  and  economic  relations  are,  and  probably  will  always  be, 
exposed  to  a  great  variety  of  risks  from  the  non-negligent  or  accidental 
conduct  of  human  beings. 

There  is  yet  a  third  class  of  risks  to  which  the  business  man  is 
subject — risks  which  arise  out  of  fundamental  or  organic  changes  in 
society  itself.  Social  wants  are  not  constant  but  are  ever  changing 
both  in  kind  and  in  quantity.  Every  person,  therefore,  who  per- 
forms services  or  produces  goods  for  society,  does  so  at  his  peril.  A 
change  in  wants  may  overnight  render  valueless  his  skill,  capital  in- 
vestment, or  goods  which  he  has  already  produced.  Changes  in 
modes  of  production,  inventions  and  increased  efficiency  in  manage- 
ment all  mean  that  those  who,  through  choice  or  necessity,  continue 
the  use  of  old  methods,  devices,  and  ways  of  doing  things  must  suffer. 
It  may  very  well  be  that  society  as  a  whole  will  profit  in  the  long 
run  by  the  new  methods  and  devices,  but  the  fact  remains  that  the 
individual  must  suffer  some  loss  unless  he  can  foresee  the  changes 
and  take  steps  to  avoid  their  consequences. 

This  is  but  a  general  statement  of  the  risks  and  hazards  to  which  a 
person  carrying  on  a  business  is  subjected.  The  problem  of  the  busi- 
ness man  in  relation  to  these  risks  and  hazards  has  several  aspects. 
In  the  first  place,  he  should  acquire  as  much  knowledge  as  possible 
concerning  the  nature  and  character  of  the  risks  to  which  he  is  exposed. 
In  the  second  place,  he  should  take  steps  to  prevent  the  materializa- 
tion of  all  those  losses  which  are  in  their  nature  avoidable  by  the 
exercise  of  reasonable  care  and  diligence.  Finally,  he  should  prepare 


INTRODUCTORY  TOPICS  5 

to  meet  and  lessen  the  shock  of  unavoidable  risks  or  resort  to  one 
device  or  another  for  the  purpose  of  shifting  them  to  someone  else. 
The  problem  of  the  business  man  in  connection  with  risk  and 
risk-bearing  has  many  legal  implications,  a  knowledge  of  which  will 
be  of  distinct  benefit  to  him  in  the  administration  of  his  affairs.  A 
study  of  these  legal  implications  should  reveal  to  him  the  principles 
and  policies  of  the  law  underlying  the  placement  and  distribution  of 
losses  resulting  from  the  various  risks  to  which  he  is  exposed.  The 
study  should  give  him  some  appreciation  of  the  extent  to  which  he 
can  legally  shift  his  risks  to  other  persons.  Finally,  it  should  give 
him  a  working  knowledge  of  the  legal  devices  by  which  this  shifting 
of  risks  can  be  accomplished. 

B 

What  are  the  considerations  involved  when  it  is  asked  whether 
one  can  legally  shift  the  risk  of  future  losses  to  another  ?  Are  there 
any  reasons  of  public  policy  which  forbid  one  person  to  assume 
another's  risks?  Are  there  any  social  advantages  to  be  gained  by 
permitting  this  to  be  done?  The  answers  to  these  questions  will 
depend  upon  the  character  of  the  risks  and  the  relation  of  the  parties. 
May  one  person  contract  to  indemnify  another  against  the  conse- 
quences of  crimes  which  the  other  may  commit  ?  May  one  contract 
to  furnish  another  all  the  coal  the  latter  may  need  in  his  business  for 
a  year?  The  two  situations  represent  opposite  extremes  in  shifting 
risks  and  the  answer  to  each  is  simple.  But  lying  between  these 
extremes  there  are  doubtful  cases  which  are  not  so  easily  solved. 

It  may  be  urged  that  any  agreement  by  which  one  person  shifts  his 
risks  to  another  is  a  gambling  transaction  and,  in  law,  unenforceable. 
Let  us  examine  this  position.  A  risk,  as  has  been  pointed  out  in 
another  connection,  is  something  which  may  or  may  not  materialize 
in  a  loss.  If,  therefore,  one  person  assumes  the  risk  of  another  for  a 
consideration,  is  he  not  in  fact  wagering  upon  the  happening  or  non- 
happening  of  an  uncertain  event  ?  Is  not  this  a  gambling  transaction  ? 
Gambling  transactions,  the  law  refuses  to  enforce.  They  tend  to 
corrupt  the  morals  of  the  community,  so  it  is  alleged,  in  that  they 
engender  and  foster  an  unwholesome  spirit  of  getting  something 
for  nothing.  But  even  if  they  do  not  tend  to  corrupt  the  morals  of 
the  community,  they  certainly  serve  no  useful  social  purposes;  and 
it  would  be  an  unwarranted  waste  of  social  energy  to  put  in  motion 
our  expensive  legal  machinery  for  their  enforcement.  The  issue, 


6  LAW  AND  BUSINESS 

then,  is  squarely  presented,  Is  an  assumption  by  one  of  the  risks 
of  another  essentially  a  gambling  transaction  ?  In  law  we  are  accus- 
tomed to  think  of  a  gambling  transaction  as  one  in  which  one  person 
promises  to  give  another  money  or  something  of  value,  upon  the 
happening  or  non-happening  of  an  uncertain  event,  in  which  neither 
has  any  interest.  In  such  a  situation,  by  hypothesis,  the  promisee 
has  nothing  to  protect.  There  is  no  possible  loss  which  is  likely  to 
fall  upon  him.  In  other  words,  there  is  an  entire  absence  of  any  risk 
to  which  he  is  exposed.  He  either  gets  something  for  nothing  or  he 
gives  something  for  nothing.  But  in  these  cases  of  risks,  which  we  shall 
be  considering,  the  promisee  does  have  a  real  vital  interest  to  protect. 
He  wishes  to  avoid  the  happening  of  an  uncertain  event — a  loss  to 
himself  or  his  property.  What  then  is  the  situation  if  someone  else, 
for  a  consideration,  promises  to  assume  his  risks  ?  Whether  the  loss 
happens  or  not,  he  has  had  his  protection.  In  neither  case  has  he 
received  something  for  nothing.  If  a  loss  happens,  he  gets  positive 
protection.  If  the  loss  does  not  happen,  he  has  had  negative  protec- 
tion. On  the  other  hand,  in  both  cases,  the  promisor  has  been  paid 
for  giving  the  protection. 

Again,  it  may  be  urged,  and  one  thinks  very  forcibly,  that  the 
result  of  permitting  a  person  to  shift  his  risks  to  another,  is  to  lower 
appreciably  the  standards  of  care  which  are  normally  exercised  over 
life  and  property.  There  is  only  so  much  social  energy  in  the  world 
and  we  are  coming  more  and  more  to  realize  that  it  is  all  needed  to 
meet  the  wants  of  society.  It  should,  therefore,  be  a  constant  care 
with  every  person  to  reduce  his  losses  to  a  minimum.  To  the  extent 
that  forms  of  vicarious  risk-bearing  place  a  premium  upon  low 
standards  of  care  over  life,  property,  and  social  energy  generally,  to 
that  extent  risk-bearing  is  socially  undesirable.  If  the  necessity  of 
immediately  facing  and  bearing  one's  losses  in  full  is  removed,  one 
of  the  most  powerful  of  all  incentives  toward  a  high  degree  of  care  is 
taken  away.  It  is,  of  course,  impossible  to  estimate  with  any  degree 
of  accuracy,  how  far  modes,  by  which  risks  can  easily  be  shifted, 
result  in  social  waste  and  destruction,  but  it  is  almost  universally 
agreed  that  there  is  an  ever-increasing  tendency  in  this  direc- 
tion. 

In  so  far  as  the  shifting  of  risks  is  permissible  in  law,  are  there  no 
safeguards  which  are  operative  to  check  this  unwholesome  tendency 
toward  lower  standards  of  care?  In  theory,  if  not  in  fact,  every 
person  pays  in  full  for  the  losses  he  suffers,  and,  in  addition,  for  the 


INTRODUCTORY  TOPICS  7 

services  which  others  perform  in  carrying  the  risks  of  his  losses.  If 
society  as  a  whole  is  temperamentally  negligent  and  careless,  obviously 
enough,  risks  are  increased;  and  the  price  which  the  individual  must 
pay  for  protection  against  losses  is  proportionately  higher.  As  every 
member  of  society  profits  by  a  decrease  in  risks  and  losses,  so  every" 
member  must  in  one  way  or  another  pay  the  price  of  an  increase  in 
them.  But  this  fact  is  not  alone  sufficient  to  counteract  the  tendency 
toward  lower  standards;  and  the  reason  is  that  the  losses  are  spread 
so  evenly  over  the  whole  of  society  that  the  individual  is  scarcely 
conscious  of  the  fact  that  he  is  bearing  his  share  of  the  burden.  The 
vision  of  the  average  individual  does  not  reach  that  far  into  the  future. 
He  does  not  realize  that  he  must  pay  his  share  of  the  losses  and  that 
he  must  pay  according  to  the  prevailing  social  standards  of  care. 
Because  of  this  short-sightedness  of  the  average  individual,  a  higher 
or  lower  premium  is  placed  upon  negligence  and  indifference  to 
consequences,  depending  upon  the  ease  with  which  risks  may  be 
shifted  to  others. 

Against  this  tendency  toward  lower  standards  of  care  over  life  and 
property,  there  is  another  safeguard  which,  though  sound  in  theory, 
does  not  always  work  well  in  practice.  Underlying  most  forms  of  risk- 
bearing,  sometimes  patent  and  sometimes  obscure,  there  is  the  theory 
of  indemnity.  This  principle,  which  runs  more  or  less  unevenly 
through  the  portions  of  the  law  dealing  with  risks,  is  that  the  indi- 
vidual shall  not  be  entitled  in  any  event  to  receive  from  the  risk-bearer 
more  than  his  actual  loss.  But  this  theory  is  not  always  a  sufficient 
safeguard  against  the  evil  in  question.  In  some  cases,  due  to  the 
inherent  nature  of  the  risk,  it  is  difficult,  if  not  impossible,  to  place 
any  accurate  or  rational  valuation  upon  the  loss.  Who,  for  instance, 
is  able  to  say  how  much  a  human  life  is  worth  in  dollars  and  cents  ? 
In  other  cases,  due  to  the  imperfections  of  our  legal  machinery,  it 
is  not  always  possible  to  disprove  a  prima  facie  loss,  because  the 
evidence  of  the  value  of  the  subject-matter,  after  the  loss  has  occurred, 
more  than  often  lies  peculiarly  within  the  knowledge  of  the  individual. 

But  on  the  other  hand,  the  power  to  shift  one's  risks  results  in 
certain  clear  gains  to  society,  which  in  the  long  run,  according  to  our 
present  best  thinking,  more  than  outweigh  the  evil  tendencies  of 
which  we  have  been  speaking.  There  is  an  ever-increasing  class  of 
persons  who  make  it  their  business  to  assume  the  risks  of  others. 
These  persons  in  their  business  make  a  very  careful  study  of  the 
forms  of  risks  in  which  they  are  interested;  though  the  study  is  pri- 


8  LAW  AND  BUSINESS 

marily  for  their  own  use  in  predicting  the  probabilities  of  loss,  yet,  at 
the  same  time,  the  data  they  collect  and  the  results  of  their  investi- 
gation furnish  valuable  assistance  to  those  who  wish  to  avoid  the 
consequences  of  their  risks  and  not  merely  to  shift  them. 

Again,  these  professional  insurers  assume  the  losses  as  they  occur 
and  spread  them  evenly  over  a  large  number  of  people  and  a  relatively 
long  period  of  time.  In  doing  this,  they  perform  distinctly  valuable 
services  not  only  to  the  individual  but  to  society  as  a  whole.  It  is 
a  service  to  the  individual  in  that  it  relieves  him  of  the  necessity  of 
meeting  the  whole  of  his  losses  as  they  occur.  The  average  individual 
is  scarcely  able  to  carry  his  own  risks  without  great  peril  to  himself. 
One  severe  and  unexpected  blow  may  prove  his  financial  undoing. 
Five  men  can  bear  their  aggregate  risks  more  easily  and  with  less 
serious  consequences  than  one  can  bear  his  individual  risks.  One 
hundred  men  can  do  the  same  thing  still  more  easily.  This  theory 
underlies  all  forms  of  indemnification:  the  greater  the  concentration 
of  risks,  the  more  evenly  the  losses  can  be  spread  and  the  more  lightly 
the  burden  carried.  This  spreading  of-  risks  is  also  a  service 
to  society  as  a  whole  in  that  it  prevents  what  might  otherwise  be 
far-reaching  consequences  from  an  individual  loss.  Our  present 
industrial  society  is  a  highly  interdependent  organization;  and 
what  prejudicially  affects  one  member  of  it  will  more  than  likely  affect 
others  in  the  same  way.  A  severe  shock  does  not  always  stop  with  the 
individual  sufferer;  it  is  very  frequently  communicated  to  others; 
and,  like  a  conflagration,  it  gains  in  intensity  as  it  spreads.  Those  who 
are  engaged  in  the  business  of  indemnification  are  in  reality  shock- 
absorbers  and  perform  valuable  services  in  localizing  shocks  and  in 
arresting  the  train  of  consequences  from  them,  causing  damage  to 
society  in  general  and  additional  damage  to  the  individual. 


Our  final  question  relates  to  the  legal  transactions  or  devices 
by  which  the  individual  can  shift  his  risks  to  someone  else.  Funda- 
mentally, all  forms  of  risk-bearing  arise  out  of  a  contract  of  one  kind 
or  another.  No  person  is  under  any  duty,  against  his  will,  to  indem- 
nify another  against  losses.  And  even  though  he  voluntarily  promises 
to  assume  another's  risks,  his  undertaking  is  not  legally  binding  upon 
him,  unless  the  promisee  has  furnished  a  consideration  to  support 
the  promise.  A  contract  is,  therefore,  the  sole  legal  device  by  which 
the  promisor  can  irrevocably  bind  himself  to  bear  the  losses  of  another. 


INTRODUCTORY  TOPICS  9 

This  risk-bearing  contract  may  appear  in  one  of  a  great  many 
forms.  But  in  this  connection  only  passing  reference  to  certain 
types  need  be  made.  It  is  sometimes  said  that  one  effect  of  every 
executory  contract  is  to  shift  risks  from  one  contracting  party  jto 
another.  An  executory  contract,  in  its  final  analysis,  is  the  purchase  by 
one  person  of  the  future  conduct  of  another.  By  making  the  contract, 
the  former  evidences  his  desire  for  the  latter 's  conduct;  and  the  con- 
tract gives  him  the  assurance  that  he  will  get  it  or  its  equivalent  in 
damages.  To  this  extent,  and  in  this  sense,  any  executory  contract 
is,  at  least  incidentally,  an  indemnity  transaction. 

There  are  types  of  contract,  however,  the  primary  purpose  of 
which  is  to  shift  risks.  A  enters  into  a  contract  with  B,  by  the  terms 
of  which  B  agrees  to  release  A  from  liability  for  all  injuries  which  he 
may  suffer  from  A's  negligence.  This  is  an  express  attempt  on  the 
part  of  one  person  to  shift  the  risks  of  his  own  wrong-doing  to  the  very 
person  likely  to  be  injured  by  it.  P  enters  into  a  contract  with  C, 
promising  to  pay  D's  debt,  or  promising  to  answer  for  D's  debt,  default 
or  miscarriage.  In  either  event,  P  by  contract  is  assuming  the  risk 
of  D's  failure,  refusal,  or  inability  to  pay  his  own  debts.  By  far 
the  largest  and  most  important  class  of  risk-bearing  contracts  is 
that  made  up  of  insurance  contracts.  These  are  almost  as  numerous 
as  the  risks  to  which  life  and  property  are  exposed.  Insurance 
against  lightning,  hail,  storms,  floods,  death,  accident,  bad  debts, 
may  be  mentioned,  as  examples  of  the  various  .and  diverse  types 
of  insurance.  Because  of  their  importance  and  because  they 
involve  fundamentally  the  same  principles  which  underlie  all  forms 
of  risk-bearing,  most  of  our  attention  in  this  connection  will  be 
devoted  to  fire  and  life  insurance  contracts. 


CHAPTER  II 

DEVICES  FOR  SHIFTING  RISKS 

i.    In  General 

CRANE  v.  CRANE  &  COMPANY 
105  Federal  Reporter  869  (1901) 

This  was  an  action  by  the  plaintiff,  who  was  a  manufacturer  of 
lumber,  to  recover  a  balance  due  for  lumber  sold  and  delivered  to  the 
defendant,  who  was  a  dealer  in  lumber.  Against  this  action  the 
defendant  sought  to  recoup  or  set  off  the  damages  alleged  to  have 
been  suffered  by  him,  in  the  failure  of  the  plaintiff  to  fill  three  orders 
relating  to  dock  oak  lumber  of  the  dates  of  October  19,  1897,  January 
31,  1898,  and  April  8,  1898.  It  was  insisted  by  the  defendant  that  in 
December,  1896,  he  made  a  contract  with  the  plaintiff,  by  the  terms 
of  which  the  latter  was  to  furnish  the  former  all  the  dock  oak  that  the 
former  would  require  for  their  trade  in  the  Chicago  market  during  the 
year  1897,  at  certain  prices  not  in  dispute,  and  that  this  contract 
was  broken  in  the  failure  of  the  plaintiff  to  fill  the  order  of  October 
19,  1897.  It  was  insisted,  also,  that  in  January,  1898,  a  like  contract 
was  made  for  the  year  1898,  except  that  the  price  was  to  be  one  dollar 
per  thousand  feet  in  excess  of  the  prices  for  the  preceding  year,  and 
that  this  contract  was  broken  in  the  failure  to  fill  orders  of  January  i, 
1898,  and  April  8,  1898,  respectively. 

GROSSCUP,  CIR.  J.  The  question  lying  at  the  threshold  of  this  case 
is  whether  the  so-called  contract  of  December,  1896,  relating  to  the 
sale  of  dock  oak  lumber  for  the  year  1897,  and  the  so-called  contract 
of  January,  1898,  relating  to  the  same  subject  for  the  year  1898,  are 
enforceable. 

The  contention  is  that  both  are  void  for  want  of  mutuality. 

It  is  within  the  legal  competency  for  one  to  bind  himself  to  furnish 
another  with  such  supplies  as  may  be  needed  during  some  certain 
period  for  some  certain  business  or  manufacture;  or  with  such  com- 
modities as  the  purchaser  has  already  bound  himself  to  furnish 
another.  Reasonable  provision  in  business  requires  that  such  con- 
tracts, though  more  or  less  indefinite,  should  be  upheld.  Thus  a 
foundry  may  purchase  all  the  coal  needed  for  the  season;  or  a  furnace 

10 


DEVICES  FOR  SHIFTING  RISKS  II 

company,  its  requirements  in  the  way  of  iron;  or  a  hotel  company, 
its  necessary  supply  of  ice.  Minnesota  Lumber  Co.  v.  Whitebreast 
Coal  Co.,  1 60  111.  85,  43  N.E.  774;  National  Furnace  Company  v. 
Keystone  Mfg.  Co.,  no  111.  427;  Railway  Co.  v.  Latham,  L.R.  9 
C.P.  16;  Smith  v.  Morse,  20  La.  Ann.  220.  So,  too,  a  dealer  in  coal 
in  a  given  locality  may  contract  for  such  coal  as  he  may  need  to  fulfil 
his  existing  contracts,  regardless  of  whether  delivery  by  him  to  his 
customers  is  to  be  immediate  or  in  the  future.  Shipman  v.  Mining 
Company,  158  U.S.  356.  In  all  these  cases,  contracts  looking  toward 
the  future,  and  embodying  subject-matter  necessarily  indefinite  in 
quantity,  have  been  upheld;  but  it  will  be  observed  that,  although 
the  quantity  under  contract  is  not  measured  by  any  certain  standard, 
it  is  capable  of  an  approximately  accurate  forecast.  The  capacity 
of  the  furnace,  the  needs  of  the  railroad,  or  the  requirements  of  the 
hotel  are,  within  certain  limits,  ascertainable  by  the  vendor.  He  is 
thus  enabled  to  make  reasonably  accurate  calculation  of  the  extent 
of  his  obligation.  Then,  too,  the  purchase  is  only  an  incident  of  the 
vendee's  business.  Presumably  the  business  will  go  on  irrespective 
of  a  rise  or  fall  in  the  prices  of  subsidiary  supplies.  There  thus 
remains  to  the  vendee  little  or  no  temptation,  on  account  of  the  rise 
or  fall  in  prices,  greatly  to  enlarge  or  diminish  the  quantity  of  his 
orders. 

The  contracts  brought  to  our  attention  have  no  such  standard  of 
approximate  certainty,  and  no  such  safeguard  against  opportunity 
to  impose  upon  the  vendor.  The  defendant  was  at  the  time  engaged 
in  no  manufacture  or  business  that  required  dock  oak  lumber  as  an 
incidental  supply,  nor  was  he  under  any  contract  to  deliver  such 
lumber  to  third  persons  at  fixed  prices.  He  was  a  lumber  merchant 
pure  and  simple — a  middleman  between  the  plaintiff,  and  such  cus- 
tomers as  usually  come  to  a  merchant.  Should  the  contract  under 
discussion  be  upheld,  the  defendant  would  be  held  to  occupy  this 
advantageous  position:  If  the  prices  of  dock  oak  lumber  rose,  he 
would,  by  that  much,  increase  his  ratio  of  profits,  and  probably, 
coming  into  a  situation  to  outbid  competitors,  increase,  also,  the 
quantum  of  orders;  if,  on  the  other  hand,  prices  fell  below  the  range 
of  profits,  the  orders  could  be  wholly  discontinued.  On  the  contrary, 
the  situation  of  the  plaintiff  would  be  this:  Should  prices  fall,  it 
could  not  compel  the  defendant  to  give  further  orders;  but,  should 
prices  rise,  the  orders  sent  in  would  be  compulsory,  and  the  loss 
measured,  both  by  the  increase  of  the  ratio  of  profits,  and  the  probable 


12  LAW  AND  BUSINESS 

increase  of  orders.  It  is  needless  to  say  that  such  a  contract  is 
unilateral,  and  void  for  want  of  mutuality.  It,  in  effect,  binds  the 
plaintiff  alone,  for  it  leaves  the  defendant — whose  sole  interest  is 
embodied  in  the  prices  obtainable — in  a  situation  either  to  go  on  or 
to  discontinue,  as  such  interest  develops. 

QUESTIONS 

1.  Was  the  contract  held  bad  in  the  principal  case  because  it  was  .a  wager- 
ing contract  ?    What  is  a  wagering  contract  ?    Why  do  courts  refuse 
to  enforce  them  ? 

2.  It  is  said  that  business  men  enter  into  executory  contracts  to  protect 
themselves  against  the  uncertainties  of  the  future.      How  does  an 
executory  contract  protect  one  in  this  respect  ?    Does  such  a  contract 
remove  the  uncertainties  or  shift  them  ? 

3.  The  court  felt  pretty  strongly  that  the  contract  under  consideration  in 
the  principal  case  was  not  fair  to  the  plaintiff.    Does  it  appear  that 
any  fraud  was  practiced  on  him?    If  not,  is  it  the  function  of  the 
courts  to  assist  a  party  in  extricating  himself  from  a  hard  bargain  into 
which  he  has  gone  with  his  eyes  open  ? 

4.  D  offers  to  sell  P  all  the  coal  he  may  order  during  the  year  1922.     P 
replies  that  he  accepts  the  offer.    P  places  an  order  in  1922  which  D 
refuses  to  fill.     P  sues  D  for  damages.    What  decision  ? 

5.  P  offers  to  sell  D  all  the  iron  he  may  need  in  his  foundry  business  during 
the  year  1922.    D  accepts  the  offer.     During  the  year  D  buys  iron 
from  X.    P  sues  D  for  damages.    What  decision  ? 

6.  P,  a  miller,  contracts  to  buy  10,000  bushels  of  wheat  from  P,  a  dealer 
in  wheat,  at  $1.25  a  bushel,  to  be  delivered  in  instalments  during  the 
year  1922.    Because  of  an  unusual  rise  in  prices,  D  refuses  to  deliver 
any  wheat  in  performance  of  the  contract.     P  sues  D  for  damages. 
What  decision  ? 

7.  C  advances  $5,000  to  D.    P,  for  a  consideration,  guarantees  the  repay- 
ment of  the  debt.    What  is  the  effect  of  this  contract  ?    It  protects 
C,  of  course,  but  against  what  does  it  protect  him  ? 

8.  A  brewing  company  enters  into  a  contract  with  P,  by  which  it  promises, 
in  consideration  of  P's  promise  to  sell  the  company's  brew  exclusively, 
to  indemnify  him  against  all  consequences  of  his  violations  of  the 
prohibition  laws.     P  sues  the  brewing  company  on  the  contract.     What 
decision  ? 

9.  P  sues  D,  his  employer,  for  damages  caused  by  the  negligence  of  D. 
D  pleads  in  defense  a  contract  by  which  P  agreed  for  a  consideration 
to  release  him,  D,  from  all  liability  for  injuries  caused  by  his  negli- 
gence.   What  decision  ? 


DEVICES  FOR  SHIPPING  RISKS  13 

2.    Speculative  Contracts 

HIBBLEWHITE  v.  M'MORINE 
5  Meeson  &  Welsby's  Reports  462  (1839) 

Debt. — The  first  count  of  the  declaration  was  upon  an  agreement 
made  between  the  plaintiff  and  the  defendant,  on  the  tenth  of  Sep- 
tember, 1838,  for  the  sale  by  the  plaintiff  to  the  defendant  of  fifty 
shares  in  the  Brighton  Railway  Company,  to  be  transferred,  delivered, 
and  paid  for,  on  or  before  the  first  day  of  March,  1839,  or  at  any  inter- 
mediate date  that  the  defendant  might  require  them,  by  paying  the 
plaintiff  for  the  said  shares  at  par  per  share,  together  with  all  calls 
that  might  have  been  paid  on  the  same,  etc.  The  count  averred 
mutual  promises,  that  the  plaintiff  was  ready  and  willing  to  transfer 
and  deliver  the  shares  to  the  defendant,  if  he  would  have  paid  for 
the  same,  and  that  he  would  have  offered  him  a  legal  transfer  of  the 
shares  but  that  the  defendant  did  not  nor  would  accept  and  pay  for 
the  said  shares,  but  altogether  refused  so  to  do,  etc. 

The  defendant  pleaded,  sixthly,  as  to  the  first  count  of  the  declara- 
tion, actionem  non}  because  he  says,  that  at  the  time  of  the  making  of 
the  agreement  therein  mentioned,  and  of  the  mutual  promises  therein 
mentioned,  he,  the  plaintiff,  was  not  possessed  of  nor  entitled  to  the  said 
fifty  shares  in  the  Brighton  Railway  Company,  in  the  said  first  count 
mentioned  to  have  been  purchased  by  the  defendant  from  the  plaintiff, 
or  any  of  them,  nor  had  the  plaintiff  at  that  time  entered  into  any 
contract  for  the  purchase  of  such  fifty  shares,  or  any  of  them,  nor  had 
he  at  that  time  any  reasonable  expectation  of  becoming  possessed  of 
or  entitled  to  any  such  shares  within  the  time  by  the  said  agreement 
for  the  fulfilment  thereof  by  the  plaintiff,  otherwise  than  by  his,  the 
plaintiff's,  purchasing  such  shares  after  the  time  of  making  the  said 
agreement.  Verification.  General  demurrer  and  joinder. 

PARKE,  B.  I  have  always  entertained  considerable  doubt  and 
suspicion  as  to  the  correctness  of  Lord  TENTEKDEN'S  doctrine  in 
Bryan  v.  Lewis;  it  excited  a  good  deal  of  surprise  in  my  mind  at  the 
time;  and  when  examined,  I  think  it  is  untenable.  I  cannot  see 
what  principle  of  law  is  at  all  affected  by  a  man's  being  allowed  to 
contract  for  the  sale  of  goods,  of  which  he  has  not  possession  at  the 
time  of  the  bargain,  and  has  no  reasonable  expectation  of  receiving. 
Such  a  contract  does  not  amount  to  a  wager,  in  as  much  as  both  the 
contracting  parties  are  not  cognizant  of  the  fact  that  the  goods  are  not 
in  the  vendor's  possession;  and  even  if  it  were  a  wager,  it  is  not  illegal, 


14  LAW  AND  BUSINESS 

because  it  has  no  necessary  tendency  to  injure  third  parties.  The 
dictum  of  Lord  TENTERDEN  certainly  was  not  a  hasty  observation 
thrown  out  by  him,  because  it  appears  from  the  case  of  Lorymer  v. 
Smith  that  he  had  entertained  and  expressed  similar  notions  four 
years  before.  He  did  not,  indeed,  in  that  case  say  that  such  a  con- 
tract was  void,  but  only  that  it  was  of  a  kind  not  to  be  encouraged; 
and  the  strong  opinion  he  afterward  expressed  appears  to  have  gradu- 
ally formed  in  his  mind  during  the  interval,  and  was  no  doubt  con- 
firmed by  the  effects  of  the  unfortunate  mercantile  speculations 
throughout  the  country  about  that  time.  There  is  no  indication  in 
any  of  the  books  of  such  a  doctrine  having  ever  been  promulgated 
from  the  Bench,  until  the  case  of  Lorymer  v.  Smith,  in  the  year  1822; 
and  there  is  no  case  which  has  been  since  decided  on  that  authority. 
Not  only,  then,  was  the  doubt  expressed  by  BOSANQUET,  J.,  in  Wells  v. 
Porter,  well  founded,  but  the  doctrine  is  clearly  contrary  to  law. 
This  plea,  therefore,  is  bad  in  substance,  and  it  is  unnecessary  to 
consider  whether  it  be  bad  in  form. 

ALDERSON,  B.  I  am  of  the  same  opinion.  I  think  the  dictum 
of  Lord  TENTERDEN  cannot  be  supported.  There  is  no  principle  in  its 
favour.  It  would  put  an  end  to  half  the  contracts  made  in  the  course 
of  trade.  Suppose  a  vendor  makes  a  contract  for  the  delivery  of  goods, 
which  may  be  performed  by  the  delivery  of  any  goods  of  the  kind 
bargained  for;  whether  he  has  them  in  his  possession  at  the  time  of  the 
contract  or  not,  can  make  no  material  difference,  if  he  has  them  ready 
to  be  delivered  at  the  time  when  the  contract  is  to  be  fulfilled.  I  dis- 
claim deciding  on  the  ground  of  public  policy;  the  policy  of  one  man  is 
not  the  policy  of  another,  and  such  a  consideration  only  tends  to 
introduce  uncertainty  into  the  law. 

MAULE,  B.  I  am  of  the  same  opinion.  I  always  considered 
the  doctrine  laid  down  in  Bryan  v.  Lewis  as  contrary  to  law,  and  most 
inconvenient  in  practice;  and  I  have  often  heard  it  spoken  of  with 
great  suspicion,  both  by  lawyers  and  mercantile  men,  upon  both 
grounds — as  against  law,  and  against  all  mercantile  convenience.  It 
was  with  great  surprise  I  heard  so  accurate  a  lawyer  give  utterance 
to  a  doctrine  so  evidently  erroneous;  but  my  surprise  is  much  dimin- 
ished by  the  circumstances  to  which  Mr.  Tomlinson  has  drawn  our 
attention,  and  by  reference  to  the  case  of  Lorymer  v.  Smith,  from 
which  it  appears  that  the  opinion  gradually  formed  itself  in  his  mind, 
not  so  much  from  considerations  of  law  as  of  mercantile  convenience— 
of  which  he  was  not,  perhaps,  so  good  a  judge — until  at  length  he 


DEVICES  FOR  SHIFTING  RISKS  15 

expressed  it  so  confidentially.     I  have  no  doubt,  however,  that  it  is 
erroneous,  and  therefore  that  this  plea  must  be  disallowed. 

Judgment  for  the  plaintiff. 

QUESTIONS 

1.  D  contracts  to  sell  P  ten  shares  of  stock  at  $90  a  share,  to  be  delivered 
sixty  days  from  the  date  of  the  making  of  the  contract.     In  an  action  by 
P  against  D  for  breach  of  this  contract,  D  contends  that  the  contract  is 
illegal  because  he  had  no  such  stock  when  he  entered  into  the  contract. 
What  decision  ? 

2.  Suppose  that  D's  defense,  in  the  foregoing  case,  is  that  at  the  time  he 
made  the  contract  he  not  only  had  no  such  stock  but  that,  to  P's  knowl- 
edge, he  had  no  reasonable  expectation  of  getting   any  such  stock. 
Would  this  alter  the  decision  ? 

3.  In  case  No.  i,  at  the  time  set  for  performance,  the  market  value  of  the 
stock  is  $100  a  share.    What  is  the  measure  of  P's  damages  in  an 
action  against  D  ? 

4.  D  enters  into  a  contract  to  sell  P  all  the  corn  he  may  raise  during  a 
certain  season  at  $i .  75  a  bushel.    At  the  time  D  has  not  even  planted 
his  corn  crop.    P  sues  D  for  breach  of  the  contract.    What  decision  ? 

5.  It  is  said  that  a  contract  like  the  one' in  the  foregoing  case  is  a  form  of 
protection  to  P.    How  does  it  protect  him.    Against  what  does  it 
protect  him? 

6.  In  question  No.  4,  how  can  D  protect  himself  ? 

KIRKPATRICK  v.  BONSALL 

72  Pennsylvania  State  Reports  155  (1872) 

AGNEW,  J.  We  cannot  pronounce  this  agreement  a  gambling 
contract  on  the  fact  of  the  writing.  A  bargain  for  an  option,  such 
as  it  presents,  may  be  legitimate,  and  for  a  proper  business  object. 
We  can  imagine  such  cases.  But  it  is  evident  such  agreements  can 
be  readily  prostituted  to  the  worst  kind  of  gambling  ventures,  and 
therefore  its  character  may  be  weighed  by  a  jury  in  connection  with 
other  facts  in  considering  whether  the  bargain  was  a  mere  scheme  to 
gamble  upon  the  change  of  prices.  The  form  of  the  venture  when 
aided  by  evidence  may  clearly  indicate  a  purpose  to  wager  upon  a  rise 
or  fall  in  the  price  of  oil  at  a  future  day,  and  not  to  deal  in  the  article 
as  men  usually  do  in  that  business.  We  must  not  confound  gambling, 
whether  it  be  in  corporation  stocks  or  merchandise,  with  what  is 
commonly  termed  speculation.  Merchants  speculate  upon  the 
future  prices  of  that  in  which  they  deal,  and  buy  and  sell  accordingly. 
In  other  words  they  think  of  and  weigh,  that  is,  speculate  upon,  the 


16  LAW  AND  BUSINESS 

probabilities  of  the  coming  market,  and  act  upon  this  lookout  into 
the  future,  in  their  business  transactions;  and  in  this  they  often 
exhibit  high  mental  grasp,  and  great  knowledge  of  business  and  of  the 
affairs  of  the  world.  Their  speculations  display  talent  and  forecast, 
but  they  act  upon  their  conclusions  and  buy  or  sell  in  a  bona  fide 
way.  Such  speculation  cannot  be  denounced.  But  when  ventures 
are  made  upon  the  turn  of  prices  alone,  with  no  bona  fide  intent  to 
deal  in  the  article,  but  merely  to  risk  the  difference  between  the  rise 
and  fall  of  its  price,  the  case  is  changed.  The  purpose  then  is  not  to 
deal  in  the  article,  but  to  stake  upon  the  rise  or  fall  of  the  price. 
No  money  or  capital  is  invested  in  the  purchase,  but  so  much 
only  is  required  as  will  cover  the  difference — a  margin,  as  it  is 
figuratively  termed.  Then  the  bargain  represents  not  a  transfer 
of  property,  but  a  mere  stake  or  wager  upon  its  future  price.  The 
difference  requires  the  ownership  of  only  a  few  hundred  or  thousands 
of  dollars,  while  the  capital  to  complete  an  actual  purchase  or  sale 
may  be  hundreds  of  thousands  or  millions.  Hence,  ventures  upon 
prices  invite  men  of  small  means  to  enter  into  transactions  far  beyond 
their  capital,  which  they  do  not  intend  to  fulfil,  and  thus  the  appar- 
ent business  in  the  particular  trade  is  inflated  and  unreal,  and  like  a 
bubble  needs  only  to  be  pricked  to  disappear,  often  carrying  down  the 
bona  fide  dealer  in  its  collapse.  Worse  even  than  this — it  tempts  men 
of  large  capital  to  make  bargains  of  stupendous  proportions,  and  then 
to  manipulate  the  market  to  produce  the  desired  price.  This,  in  the 
language  of  gambling  speculation,  is  making  a  corner — that  is  to 
say,  the  article  is  so  engrossed  or  manipulated  as  to  make  it  scarce  or 
plenty  in  the  market  at  the  will  of  the  gamblers,  and  then  to  place 
its  price  within  their  power.  Such  transactions  are  destructive  of 
good  morals  and  fair  dealing,  and  of  the  best  interests  of  the  commod- 
ity. If  the  article  be  stocks,  corporations  are  crushed  and  innocent 
stockholders  ruined  to  enable  the  gambler  in  its  price  to  accomplish 
his  ends.  If  it  be  merchandise,  e.g.,  grain,  the  poor  are  robbed  and 
misery  engendered. 

These  remarks  perhaps  contain  nothing  new,  but  they  are  made 
to  show  how  a  contract,  legal  on  its  face,  may  become  an  instrument 
of  illegal  and  ruinous  schemes,  injurious  to  the  community  and  con- 
trary to  the  highest  policy  of  the  state.  The  illegal  purpose  is  therefore 
a  fact  falling  within  the  province  of  the  jury,  and  when  found  by  them 
brings  the  contract  under  the  ban  of  the  law.  If  this  purpose  or 
intent  be  nothing  but  to  wager  on  the  rise  or  fall  in  the  price  of  an 


DEVICES  FOR  SHIFTING  RISKS  17 

article,  and  not  to  deal  in  it  bona  fide,  the  law  must  pronounce  the 
bargain  a  gambling  contract.  This  brings  us  to  consider  the  defend- 
ants' offer  of  evidence  which  the  court  refused. 

Every  offer  of  testimony  is  to  be  judged  of  by  the  court  upon  the 
state  of  the  evidence  already  in,  or  of  that  with  which  the  offer  is 
proposed  to  be  followed.  How  then  did  this  case  stand  when  the 
offer  was  made  ?  The  plaintiff  had  given  in  evidence  a  written  agree- 
ment, not  illegal,  it  is  true,  on  its  face,  but  of  that  kind  used  in  gam- 
bling ventures.  The  defendants  had  shown  by  the  plaintiff's  own 
testimony  that  he  was  not  a  refiner  of  oil,  or  one  who  would  buy  for  his 
own  consumption — that  he  had  not  sold  the  oil  when  he  made  use 
of  his  call  or  option  and  therefore  had  no  contract  of  his  own  to 
fulfil — and  also  that  he  did  not  intend  to  call  for  the  oil  if  the  market 
price  had  gone  below  the  price  fixed  in  the  agreement.  What  intent 
would  reasonably  be  inferred  from  these  circumstances  ?  Certainly 
the  belief  induced  is  that  there  was  not  an  intent  to  bargain  for  oil  for  a 
real  business  purpose.  Now  if  besides  this  contract  it  could  be 
shown  that  many  others  of  a  similar  kind  were  entered  into  by  the 
same  man,  at  and  about  the  same  time,  certainly  it  would  strengthen 
the  conviction  that  the  plaintiff  was  not  a  bona  fide  contractor  in  a 
legitimate  business;  and  if  we  then  add  to  this  the  fact  that  he  was 
financially  unable  to  take  and  pay  for  the  total  amount  of  oil  he  had 
contracted  for,  that  conviction  would  become  more  firm,  and  that  the 
real  nature  of  his  contracts  was  a  wager  on  the  rise  and  fall  of  the 
price  of  oil.  The  offer  went  therefore  to  the  very  question  whether 
he  was  gambling  in  the  price  of  oil.  The  objection  to  the  offer  that  it 
was  not  of  the  time  of  the  transaction  is  not  tenable,  for  this  agree- 
ment bears  date  the  i$th  of  November,  1870,  and  the  contracts 
offered  to  be  shown  were  those  to  mature  on  or  prior  to  the  ist  day 
of  January,  1871.  They  were  therefore  not  too  distant  in  time  to 
have  a  bearing  upon  the  character  of  the  contract  in  question.  The 
objection  that  these  contracts  would  throw  no  light  on  the  issue  is 
plainly  not  valid,  for  the  similarity  of  the  contracts  and  the  prox- 
imity of  tune  considered  with  the  financial  inability  of  the  plaintiff  to 
fulfil  them  all,  are  not  slight  evidence  merely  of  the  wagering  intent. 
It  is  no  good  answer  that  the  plaintiff  had  stated  his  ability  to  con- 
trol the  means  of  performing  his  contract,  for  the  defendants  were 
not  bound  by  his  statement. 

Had  the  evidence  been  received,  and  had  the  jury  been  sat- 
isfied of  the  truth  of  it,  the  case  presents  that  of  a  man  not 


1 8  LAW  AND  BUSINESS 

engaged  in  the  oil  business  proper,  bargaining  for  an  immense  quantity 
of  oil  far  beyond  his  ability  to  pay  for,  with  no  intent  to  consume,  use 
or  sell  it,  entering  into  a  similar  contract  precisely  adapted  to  a 
wager  on  the  price,  and  with  no  intent  to  call  for  a  delivery  of  the  oil 
unless  the  changes  of  the  price  fell  out  in  his  favor.  This  presented 
a  question  of  fact  for  the  jury,  and  not  merely  the  legal  interpretation 
of  the  paper  on  its  facts,  as  a  wagering  contract.  The  rejection  of 
the  offer  was  therefore  error. 

Judgment  reversed  and  a  venire  facias  de  now  awarded. 

QUESTIONS 

1.  This  was  an  action  by  the  plaintiff  against  the  defendants  for  a  breach 
of  contract  to  sell  oil  in  the  future.    The  court  below  gave  judgment 
for  the  plaintiff.    This  judgment  was  reversed  on  appeal.    Why  was 
it  reversed  ? 

2.  What  is  meant  by  dealing  in  stock  "on  margins"  ?    Is  a  transaction  on 
"margins"  essentially  a  gambling  transaction?    Is  the  fact  that  one 
buys  and  sells  "on  margin"  evidence  that  one  is  gambling? 

3.  What  is  meant  by  selling  "short"  ?    Is  selling  "short"  per  se  a  gambling 
transaction?    Is  selling  "short"  evidence  of  a  gambling  transaction? 

4.  What  difference  did  it  make  in  the  principal  case  that  the  plaintiff  was 
not  a  refiner  of  oil  ?    That  the  plaintiff  was  financially  unable  to  have 
taken  and  paid  for  all  the  oil  he  contracted  for  ? 

5.  What  test,  if  any,  did  the  court  lay  down  for  determining  the  validity  of 
a  speculative  contract  ? 

6.  D  engages  A,  an  agent,  to  buy  and  sell  stock  on  the  stock  market  and 
promises  him  a  commission  for  his  services.    To  A's  knowledge,  D 
intends  neither  to  deliver  nor  to  receive  stock  in  performance  of  his 
various  contracts.    A  sues  D  for  his  commissions.    What  decision? 

TAYLOR  v.  HOWARD 

192  Pennsylvania  State  Reports  304  (1899) 

The  auditor,  Francis  Shunk  Brown,  Esq.,  reported  on  the  claim 
of  William  H.  Howard  as  follows:  H.  C.  Todd,  Esq.,  presented  claim 
of  William  H.  Howard  for  $11,921.62.  Mr.  Howard  is  a  capitalist 
and  a  farmer.  On  March  13,  1893,  he  bought  100  shares  of  Lehigh 
Coal  and  Navigation  Company  for  $4,337 . 50,  and  the  next  day  paid 
L.  H.  Taylor  &  Company  $2,000.  During  the  month  of  April,  1893, 
he  appears  to  have  ordered,  bought,  and  sold  about  1,200  shares  of 
stock.  On  April  30,  1893,  he  ordered  sold  " short"  100  shares  of 
Baltimore  and  Ohio  Railroad  Company  and  100  shares  of  Phila- 


DEVICES  FOR  SHIFTING  RISKS  19 

delphia,  Reading  and  New  England  Railroad  Company.  On  July  31, 
1895,  he  owed  Taylor  &  Company,  $50,161 .61.  In  November,  1895, 
he  again  turned  "bear"  selling  "short"  in  that  single  month  500 
shares  of  Reading  Railway  Company,  200  shares  of  American  Tobacco 
Company,  100  shares  of  American  Sugar  Refining  Company,  common, 
and  100  shares  of  Welsbach  Light  Company.  In  December,  1895, 
he  also  made  short  sales  of  Welsbach  Light  Company  and  American 
Sugar  Refining  Company,  common.  The  account  had  been  closed  in 
1893,  but  reopened  thereafter.  No  stock  was  delivered  to  him  after 
March  13, 1893,  when  the  account  was  reopened.  He  testified  that  he 
did  not  intend  to  gamble.  The  account,  however,  including  his 
enormous  short  sales,  has  all  the  earmarks  of  a  gaming  transaction, 
and  I  so  find  it.  I  disallow  the  claim. 

Errors  assigned  were  in  dismissing  exceptions  to  auditor's  report. 

MITCHELL,  J.  It  has  been  settled  by  this  court  so  often  that 
it  ought  not  to  require  reiteration  that  dealing  in  stocks  even 
on  margins  is  not  gambling.  Stocks  are  as  legitimate  subjects  of 
speculative  buying  and  selling  as  flour  or  dry  goods  or  pig  iron.  A 
man  may  buy  any  commodity,  stock  included,  to  sell  on  an  expected 
rise,  or  sell  ''short"  to  acquire  and  deliver  on  an  expected  fall,  and  it 
will  not  be  gambling.  Margin  is  nothing  but  security,  and  a  man 
may  buy  on  credit  with  security  or  without,  or  on  borrowed  money, 
and  the  money  may  be  borrowed  from  his  broker  as  well  as  from  a 
third  person.  The  test  is,  did  he  intend  to  buy,  or  only  to  settle  on 
differences  ?  If  he  had  bought  and  paid  for  his  stock,  held  it  for  a 
year  and  then  sold,  no  one  would  call  it  gambling  and  yet  it  is  just  as 
little  so,  if  he  had  it  but  an  hour  and  sold  before  he  had  in  fact  paid  for 
it.  And  so  with  selling.  Every  merchant  who  sells  you  something 
not  yet  in  his  stock  but  which  he  undertakes  to  get  for  you,  is  selling 
"short,"  but  he  is  not  gambling,  because,  though  delivery  is  to  be  in 
the  future,  the  sale  is  present  and  actual.  The  true  line  of  distinction 
was  laid  down  in  Peters  v.  Grim,  149  Pa.  163,  and  has  not  been  departed 
from  or  varied,  "A  purchase  of  stock  for  speculation,  even  when  done 
merely  on  margin,  is  not  necessarily  a  gambling  transaction.  If  one 
buys  stock  from  A  and  borrows  the  money  from  B  to  pay  for  it,  there 
is  no  element  of  gambling  in  the  operation,  though  he  pledges  the 
stock  with  B  as  security  for  the  money.  So,  if  instead  of  borrowing 
the  money  from  B,  a  third  person,  he  borrows  it  from  A,  or,  in  the 
language  of  brokers,  procures  A  to  '  carry '  the  stock  for  him,  with  or 
without  margin,  the  transaction  is  not  necessarily  different  in  char- 


20  LAW  AND  BUSINESS 

acter.  But  in  this  latter  case,  there  being  no  transfer  or  delivery 
of  the  stock,  the  doubt  arises  whether  the  parties  intended  there  should 
ever  be  a  purchase  or  delivery  at  all.  Here  is  the  dividing  line.  If 
there  was  not  under  any  circumstances  to  be  delivery,  as  part  of  and 
completing  a  purchase,  then  the  transaction  was  a  mere  wager  on  the 
rise  and  fall  of  prices,  but  if  there  was  in  good  faith  a  purchase,  then 
the  delivery  might  be  postponed,  or  made  to  depend  on  a  future  con- 
dition, and  the  stock  carried  on  margin  or  otherwise  in  the  meanwhile, 
without  affecting  the  legality  of  the  operation."  This  has  been 
uniformly  followed.  Hopkins  v.  O'Kane,  169  Pa.  478;  Wagner  v. 
Hildebrand,  187  Pa.  136.  And  the  rule  goes  so  far  that  an  agreement 
for  an  actual  sale  and  purchase  will  make  the  transaction  valid 
although  it  originated  in  an  intention  merely  to  wager.  Anthony  &  Co. 
v.  Unangst,  174  Pa.  10. 

Turning  now  to  the  facts  of  the  present  case,  it  is  clear  that  the 
law  was  not  correctly  applied  by  the  auditor  and  the  court  below. 
The  brokers  made  an  assignment  on  December  21,  1895,  on  which 
day  they  held  certain  stock  for  appellant,  which  they  had  bought 
on  his  order,  and  he  had  certain  other  stock  which  they  had  sold  on 
his  order,  but  which  he  had  not  yet  delivered  to  them.  He  desired  to 
close  the  account,  complete  the  mutual  deliveries,  and  receive  the 
balance  which  the  transactions  left  in  his  favor.  He  was  entitled  to 
do  so,  even  if  the  transactions  were  wagering,  the  agreement  of  the 
parties  to  make  the  sales  actual  would,  under  Anthony  6°  Co.  v. 
Unangst,  174  Pa.  10,  supra,  have  made  them  valid.  It  is  true,  the 
settlement  was  not  actually  made  until  January  10,  but  it  was  made 
as  of  December  20,  the  day  before  the  assignment,  and  the  auditor 
reports  that  there  had  been  no  change  of  values  meanwhile.  The 
time  of  striking  a  balance  on  the  books  and  delivering  the  stock  was 
not  important.  Delivery  is  not  in  itself  a  material  fact.  Its  only 
value  is  as  evidence  of  the  intent  to  make  a  bona  fide  sale.  If  such  is 
the  intent,  the  delivery  may  be  present  or  future  without  affecting 
validity. 

But  there  was  no  sufficient  evidence  that  the  transactions  were 
illegal  at  any  time.  The  auditor  reports  that  "the  stocks  ordered  to 
be  bought  or  sold  by  the  customers  of  L.  H.  Taylor  &  Co.  were,  as 
shown  by  their  books,  actually  bought  and  sold,  and  as  this  evidence 
is  uncontradicted  I  must  a-nd  do  so  find.  Thus,  so  far  as  L.  H.  Taylor 
&  Co.  were  concerned,  the  transactions  were  not  fictitious,  but  were 
actual  purchases  and  sales  of  stocks."  This  finding  should  have  been 


DEVICES  FOR  SHIFTING  RISKS  21 

a  warning  to  caution  in  taking  a  different  view  of  the  appellant's 
position  in  the  transactions.  It  is  true,  the  purchase  or  sale  may 
be  actual  on  part  of  the  broker  and  merely  a  wager  on  part  of  the 
customer  (see  Champlin  v.  Smith,  164  Pa.  481),  but  there  should  JDC 
at  least  fairly  persuasive  evidence  of  the  difference.  There  is  none 
here.  The  transactions  covered  by  the  account  began  with  a  small 
cash  balance  to  appellant's  credit,  followed  by  an  order  to  buy  200 
shares  of  Wabash  common,  which  were  bought  by  the  brokers, 
paid  for  by  appellant  and  delivered  to  him.  The  close,  two  years 
and  half  later,  showed,  as  already  said,  a  large  number  of  shares  in 
the  hands  of  the  brokers,  bought  for  appellant  and  of  which  he 
demanded  delivery,  and  other  shares  sold  for  him,  and  which  he 
had  in  his  possession  ready  to  deliver.  As  to  the  intermediate 
transactions,  appellant  testified,  "It  was  always  the  intention  to 
buy  the  stocks  out  and  out  and  pay  for  them,  and  I  had  money  to 
do  it  with."  In  the  face  of  these  facts  and  this  uncontradicted 
testimony,  the  auditor  found  that  "the  account,  including  his 
enormous  short  sales,  has  all  the  earmarks  of  a  gaming  transaction 
and  I  so  find  it."  This  was  a  mere  inference,  unwarranted  by  the 
account  itself,  and  wholly  opposed  to  all  the  evidence  in  the  case. 

Judgment,  so  far  as  it  relates  to  appellant's  claim,  reversed  and 
claim  directed  to  be  allowed. 

QUESTIONS 

1.  D  contracts  to  sell  P  100  shares  of  stock  at  $90  a  share,  to  be  delivered 
ninety  days  from  date.    At  the  time  the  contract  was  made,  D  owned  no 
stock.    When  the  day  for  performance  came,  D  defaults.    P  sues  D 
for  damages.    He  proves  that  on  the  day  set  for  performance  the  stock 
was  selling  for  $100  a  share.    May  P  recover?    Whatt  is  the  measure 
of  his  damages  ? 

2.  In  the  foregoing  case  when  the  day  set  for  performance  arrives,  D 
promises  to  pay  P  $1,000  in  consideration  of  P's  promise  to  release  him 
from  liability  for  damages  on  the  original  contract.    This  is  an  action 
by  P  to  recover  the  $1,000.    What  defense  can  D  possibly  rely  upon? 
What  decision  ? 

3.  In  case  No.  i,  it  is  agreed  by  the  parties  that  on  the  day  of  performance, 
neither  will  call  for  performance  and  that  the  contract  shall  be  deemed 
to  have  been  performed  by  a  settlement  of  differences  on  that  day. 
P  sues  D  for  $1,000.    What  decision  ? 

4.  P  contracts  to  sell  wheat  to  D  in  May  at  $i .  50  a  bushel.    When  May 
arrives,  wheat  is  $1.25  a  bushel.    P  tenders  D  a  warehouse  receipt 
entitling  D  to  the  amount  of  wheat  called  for  by  the  contract.    This  D 


22  LAW  AND  BUSINESS 

refuses  to  receive.  P  sues  D  for  damages.  D  contends  that  the  con- 
tract is  illegal,  because  at  the  time  he  entered  into  it,  he  never  intended 
to  receive  a  delivery  of  wheat.  What  decision  ? 

5.  P  and  D  enter  into  a  contract  for  the  sale  of  wheat  in  the  future.    At  the 
time  of  the  transaction,  P  intends  to  make  a  delivery  of  wheat,  but  D 
does  not  intend  to  receive  it.    What  decision  in  an  action  by  P  against  D 
for  breach  of  the  contract  ?    What  decision  in  an  action  by  D  against 
P  on  the  contract  ? 

6.  P  and  D  enter  into  a  contract  for  the  sale  and  purchase  of  future  wheat. 
Neither  intends  that  any  wheat  shall  be  delivered  in  performance  of  the 
contract,  but  it  is  provided  that  a  delivery  may  be  demanded  by  either 
party.     P  sues  D  for  breach  of  the  contract.     What  decision  ? 

7.  P  is  a  miller,  manufacturing  flour  for  the   wholesale   trade.     In   Sep- 
tember, he  buys  10,000  bushels  of  wheat  at  $1.50  a  bushel  which  he 
intends  to  make  into  flour  and  put  on  the  market  the  following  year. 
At  the  same  time,  he  sells  10,000  bushels  of  May  wheat,  to  D  at  $i .  50 
a  bushel.    A  the  time  he  makes  the  second  contract,  he  does  not  con- 
template an  actual  delivery  of  wheat  to  D.    In  the  following  May,  wheat 
is  worth  $i  .40  a  bushel.    What  are  the  rights  of  D  on  this  contract  ? 

8.  The  court  in  the  principal  case  says  that  delivery  is  the  test  of  the  validity 
of  speculative  contracts    Do  you  think  that  delivery  is  a  proper  test 
of  the  validity  of  such  contracts?    l,f  not,  what  better  test  can  you 
suggest? 

3.     Contracts  of  Insurance 

a)  In  General 

HICKS  v.  BRITISH  AMERICA  ASSURANCE  COMPANY 
162  New  York  Reports  284  (1900) 

Appeal  from  a  judgment  of  the  Appellate  Division  of  the  Supreme 
Court  in  the  fourth  judicial  department,  entered  February  8,  1897, 
affirming  a  judgment  in  favor  of  plaintiff  entered  upon  a  verdict,  and 
an  order  denying  a  motion  for  a  new  trial. 

The  action  was  brought  to  recover  on  an  alleged  oral  contract  to 
insure  a  certain  building  in  the  village  of  Penn  Yan,  entered  into 
between  George  C.  Hicks,  the  plaintiff's  assignor,  and  Melmoth 
Hobart,  the  agent  of  the  defendant. 

PARKER,  C.  J.  We  are  agreed  that  the  verdict  of  the  jury 
establishes  that  on  the  thirtieth  day  of  December,  1893,  defendant's 
agent  Hobart  had  a  conversation  with  Colonel  Hicks,  the  plaintiff's 
assignor,  the  legal  effect  of  which  was  to  create  a  contract  of  present 
insurance  in  the  sum  of  $2,500  upon  property  of  Colonel  Hicks, 


DEVICES  FOR  SHIFTING  RISKS  23 

which  was  consumed  by  fire  two  days  later.  The  agreement  that  the 
contract  was  one  of  present  insurance  accords  with  the  allegations  of 
the  complaint,  the  theory  of  counsel  as  shown  by  their  method  of 
trial  and  the  charge  of  the  court.  That  position  cannot  be  attacked 
from  any  source,  for  either  that  which  was  said  operated  to  create  a 
contract  of  present  insurance,  or  else  no  contract  was  ever  made  bind- 
ing upon  the  defendant.  The  evidence  tended  to  show  a  contract  to 
insure,  and  nothing  else.  It  is  not  pretended  that  a  contract  of  any 
kind  between  these  parties  was  made  after  the  conversation  of 
December  30.  The  jury  have  found  that  the  defendant's  agent 
said  to  Hicks,  after  a  general  discussion  on  the  subject  of  insuring 
the  property,  "you  are  insured  from  noon  on  the  thirtieth  day  of 
December,  1893,  to  noon  of  December  30,  1894."  The  legal  effect  of 
this  answer  to  the  application  for  insurance  made  by  Colonel  Hicks 
was  to  create  a  complete,  binding  agreement  for  insurance  for  the 
period  named,  upon  which  he  was  entitled  to  recover  for  the  damages 
sustained  by  the  fire  had  he  made  performance  on  his  part.  (Ruggles 
v.  American  Central  Insurance  Co.,  114  N.Y.  415.)  This  contract  of 
insurance,  although  verbal,  embraced  within  it  the  provisions  of 
the  standard  policy  of  fire  insurance,  which  the  legislature  in  its 
wisdom  formulated  for  the  protection  of  both  insured  and  insurer. 
It  is  usual  for  the  company  to  issue  a  policy  of  insurance  evidencing 
the  contract  between  the  parties  but  the  policy  accomplishes  nothing 
more  than  that,  for  when  the  contract  is  entered  into  between 
the  agent  and  the  owner,  whether  the  binder  be  verbal  or  in  writing, 
it  includes  within  it  the  standard  form  of  policy  and  the  contract  is 
a  completed  one. 

Plainly,  therefore,  it  is  not  true  that  the  plaintiff  suffered  damage 
in  the  amount  of  the  contract  of  insurance  by  reason  of  the  failure 
of  the  defendant  to  deliver  a  policy  reciting  the  terms  of  the  contract 
entered  into,  and  hence  the  judgment  cannot  be  affirmed  on  the  ground 
that  the  plaintiff  sustained  damages  in  the  sum  of  $2,500,  because  the 
defendant  omitted  to  deliver  a  policy.  Nor  do  I  think  that  sound 
public  policy  would  sanction  the  creation  of  such  a  precedent  even 
if  a  legal  principle  could  be  found  upon  which  to  rest  it. 

The  legislature  of  the  state  of  New  York  has  prescribed  a  standard 
form  of  policy  for  the  protection  of  both  insurer  and  insured.  It 
contains  provisions  specially  protecting  the  insured  from  harsh 
methods  by  insurance  companies.  On  the  other  hand,  it  provides 
that  which  experience  has  shown  to  be  necessary  in  order  to  protect 


24  LAW  AND  BUSINESS 

insurance  companies  from  being  victimized  through  fraud,  and 
among  the  conditions  which  the  legislature  in  its  wisdom  has  caused 
to  be  incorporated  into  the  standard  policy  is  one  making  it  necessary 
that  the  insurer  shall  have  immediate  notice  of  the  facts  and  circum- 
stances of  the  fire;  another  that  within  sixty  days  the  owner  shall 
present  proofs  of  loss,  duly  verified,  in  which  shall  be  stated  the  cir- 
cumstances of  the  fire  and  the  value  of  the  property  destroyed  and 
various  other  things  which  it  is  deemed  important  that  insurance 
companies  should  know  before  being  called  upon  to  adjust  a  loss; 
still  another  provides  that  no  local  agent  shall  have  the  power  to  waive 
any  of  these  written  conditions,  except  by  a  writing.  It  is  unnecessary 
to  present  the  reasons  which  induced  the  legislature  to  require  these 
conditions  precedent  to  a  recovery  upon  a  policy  of  insurance;  it 
is  sufficient  for  our  purpose  that  the  legislature  declared  that  it  should 
be  so,  and  we  should  see  to  it  that  the  general  trend  of  our  decisions 
is  toward  the  enforcement  of  the  legislature's  command  instead  of  its 
nullification.  This  plaintiff  had  the  right,  as  it  is  conceded  on  all 
hands,  to  recover  on  the  contract  of  insurance  which  her  assignor 
made  with  the  defendant's  agent,  whether  a  policy  was  subsequently 
delivered  to  him  or  not;  but  as  the  standard  policy  was  necessarily 
a  part  of  the  contract,  he  should  be  required  to  comply  with  the  con- 
ditions of  that  policy  and  give  notice  of  the  facts  and  circumstances 
of  the  fire  and  present  proofs  of  loss  duly  verified.  The  view  taken 
by  some  of  my  brethren,  however,  is  that  it  was  unnecessary  to  give 
notice  of  the  fire  and  present  proofs  of  loss  within  sixty  days,  or  at 
any  other  time,  because,  it  is  said,  such  an  action  need  not  be  treated 
as  on  a  contract  of  insurance,  but  on  a  contract  to  give  a  policy,  which 
has  not  been  carried  out,  and,  therefore,  prior  to  beginning  'suit,  which 
may  be  done  at  any  time  within  six  years  instead  of  one  year,  as  pro- 
vided in  the  standard  policy,  the  insured  has  nothing  whatever  to  do 
when  he  sustains  a  loss  by  fire  but  lie  until,  as  in  this  case,  several 
months  have  passed,  or,  in  some  other  case,  until  years  have  gone  by, 
without  giving  the  company  notice  of  the  fire  or  any  proofs  of  loss 
whatever;  he  may  bring  suit  claiming  that  two  days,  or  less  or  more, 
before  the  fire,  the  defendant's  local  agent,  without  receiving  any 
premium,  agreed  to,  but  did  not,  issue  a  policy,  for  which  defendant 
is  liable  to  plaintiff  in  the  amount  of  the  sum  for  which  it  was  agreed 
that  the  policy  should  issue.  If  such  a  procedure  should  be  sanc- 
tioned by  this  court,  then  might  an  insurance  company  be  mulcted 
in  damages  without  having  had  an  opportunity  to  investigate 


DEVICES  FOR  SHIFTING  RISKS  25 

promptly  the  origin  of  the  fire  and  the  value  of  the  thing  destroyed, 
and  thus  would  the  door  be  opened  wide  for  perpetration  of  fraud. 

It  follows,  if  the  views  expressed  be  sound,  that  the  action  is  upon 
a  contract  of  insurance  and  not  one  for  damages  resulting  from  a 
failure  to  deliver  a  policy,  and,  hence,  that  proofs  of  loss  were  neces- 
sary in  the  absence  of  a  waiver  thereof  by  the  defendant,  of  which  there 
is  no  proof,  and  the  failure  to  so  charge  was  error,  calling  for  a  reversal 
of  the  judgment. 

The  judgment  should  be  reversed. 

QUESTIONS 

1.  What  was  the  issue  under  consideration  in  the  principal  case  ?    How  was 
the  issue  decided  ?    What  rule  of  law  can  be  deduced  from  the  decision  ? 

2.  The  statute  of  frauds  provides  that  no  action  can  be  brought  to  charge 
a  party  on  a  contract  to  answer  for  the  debt,  default,  or  miscarriage  of 
another,  unless  the  contract  is  in  writing.    Does  this  provision  affect  the 
validity  of  contracts  of  insurance  ? 

3.  The  statute  provides  that  no  action  can  be  brought  on  a  contract  which 
is  not  to  be  performed  within  the  space  of  two  years  from  the  making 
thereof,  unless  the  contract  is  in  writing.     Does  this  provision  affect  a 
contract  by  which  an  insurance  company  agrees  to  insure  P's  house 
against  fire  for  a  period  of  five  years  ? 

4.  Does  a  contract  of  insurance  arise  out  of  offer  and  acceptance  just  as 
any  ordinary  contract  does  ? 

5.  When  does  a  contract  of  insurance  become  binding  ?    Is  delivery  of  the 
policy  necessary  to  the  validity  of  the  contract  ? 

6.  Is  a  consideration  necessary  to  the  validity  of  a  contract  of  insurance  ? 
What  is  the  usual  consideration  for  the  insurer's  promise  to  insure  ? 

7.  The  D  Insurance  Company  insures  the  life  of  P.     P  pays  the  first 
premium  upon  the  delivery  of  the  policy.     Before  he  pays  his  next 
premium,  he  is  notified  by  the  company  that  his  insurance  has  been 
discontinued.    What  are  the  rights  of  P  under  the  circumstances. 

8.  In  the  foregoing  case,  P  pays  the  first  premium,  but  refuses  to  pay  any 
premiums  thereafter,     (a)  The  company  brings  an  action  against  him 
to  recover  the  next  annual  premium.    What  decision?     (6)  The  com- 
pany brings  an  action  to  recover  damages  for  P's  failure  to  pay  premiums. 
What  decision?     (c)  If  the  company  cannot  recover  in  either  of  the 
two  foregoing  actions,  what  is  its  recourse  in  case  the  insured  refuses  or 
fails  to  pay  his  premiums  when  due  ? 

9.  The  D  Company  insures  P's  house  for  a  period  of  five  years,  P  agrees 
to  pay  annually  a  certain  premium.     He  pays  the  first  premium  but 
refuses  to  pay  any  thereafter,     (a)  The  company  sues  for  the  premiums 


26     •  LAW  AND  BUSINESS 

as  they  fall  due.    What  decision  ?    (6)  The  company  sues  P  for  damages 
for  breach  of  his  contract.     What  decision  ? 

10.  It  is  said  that  underlying  all  contracts  of  insurance  is  the  theory  of 
indemnity.  What  is  meant  by  this  ?  To  what  extent  can  this  theory 
be  worked  out  in  fire  insurance  ?  To  what  extent  can  it  be  worked  out 
in  lif e  insurance  ?  How  is  the  theory  of  indemnity  worked  out  in  insur- 
ance contracts  generally  ? 

b)   The  Insurable  Interest 

RUSE  v.  THE  MUTUAL  BENEFIT  LIFE 
INSURANCE  COMPANY 

23  New  York  Reports  516  (1861) 

SELDEN,  J.  Our  inquiry,  therefore,  is  whether  at  common  law, 
independent  of  any  statute,  it  is  essential  to  the  validity  of  a  policy, 
obtained  by  one  person  for  his  own  benefit  upon  the  life  of  another 
that  the  party  obtaining  the  policy  should  have  an  interest  in  the 
life  insured. 

A  policy,  obtained  by  a  party  who  has  no  interest  in  the  subject 
of  insurance,  is  a  mere 'wager  policy.  Wagers  in  general,  that  is, 
innocent  wagers,  are,  at  common  law,  valid;  but  wagers  involving 
any  immorality  or  crime,  or  in  conflict  with  any  principle  of  public 
policy,  are  void.  To  which  of  these  classes,  then,  does  a  wagering 
policy  of  insurance  belong  ? 

Aside  from  authority,  this  question  would  seem  to  me  of  easy 
solution.  Such  policies,  if  valid,  not  only  afford  facilities  for  a 
demoralizing  system  of  gaming,  but  furnish  strong  temptations  to  the 
party  interested  to  bring  about,  if  possible,  the  event  insured  against. 
In  respect  to  insurance  against  fire,  the  obvious  temptation  presented 
by  a  wagering  policy  to  the  commission  of  the  crime  of  arson  has 
generally  led  the  courts  to  hold  such  policies  void,  even  at  common 
law.  It  was  so  held  in  England,  at  an  early  day,  by  Lord  Chancellor 
King,  in  Lynch  v.  Dalzell  (4  Bro.  P.  C.,  431),  and  by  Lord  Hardwicke, 
in  Saddlers'  Company  v.  Babcock  (2  Atk.,  557);  and  the  courts  in  this 
country  have  generally  acquiesced  in  and  approved  of  the  doctrine. 
In  this  state,  such  policies  would  fall  under  the  condemnation  of 
our  statute  avoiding  all  wagers  and  gambling  contracts  of  every  sort; 
but  they  would,  no  doubt,  also  be  held  void,  independently  of  that 
statute,  at  common  law. 

In  Howard  v.  The  Albany  Insurance  Company  (3  Denio,  301), 
BRONSON,  Ch.  J.  asserted  the  necessity  of  an  interest  in  the  assured 


DEVICES  FOR  SHIFTING  RISKS  27 

in  all  such  cases,  referring,  in  support  of  the  doctrine,  not  to  the 
statute  but  to  the  decisions  of  the  Lord  Chancellors  King  and 
Hardwicke  (supra). 

In  regard,  however,  to  marine  insurances,  a  different  rule  seems 
to  have  prevailed  in  England;  and  the  cases  of  Clendining  v.  Church 
(3  Caines,  141),  Juhel  v.  Church  (2  John.  Cas.  333),  and  Buchanan 
v.  Ocean  Insurance  Company  (6  Cow.  318),  are  supposed  to  have 
established  the  same  rule  in  this  state.  No  reason,  that  I  am  aware 
of,  has  ever  been  given  for  this  difference  between  fire  and  marine 
policies.  The  latter,  when  of  a  wagering  character,  are  vicious  and 
evil  in  their  tendencies  as  well  as  the  former,  and  have  been  generally 
considered  as  noxious  and  dangerous,  whenever  the  question  has 
arisen.  They  should,  therefore,  as  it  would  seem,  for  the  reasons 
applied  to  policies  against  fire,  have  been  held  void,  as  contrary  to 
public  policy. 

The  distinction  between  these  two  classes  of  policies  is,  in  my 
view,  a  mere  matter  of  accident,  and  grew  out  of  the  peculiar  manner 
in  which  the  question  was  presented  in  respect  to  marine  policies. 
The  case  of  Depaba  v.  Ludlow  (Comyn,  361)  shows  how  the  doctrine, 
that  wagering  policies  upon  ships  are  valid,  originated.  The 
defendant  there  had  insured  the  plaintiff,  " interest  or  no  interest." 
On  the  trial  it  was  objected  that  the  plaintiff  could  not  recover,  unless 
he  had  a  property  in  the  ship ;  but  the  court  said  that  the  insurance 
was  good,  and  that  the  import  of  the  clause,  "  interest  or  no  interest," 
was,  that  the  plaintiff  had  no  occasion  to  prove  his  interest.  Had  the 
question  been  directly  presented  in  this  case,  whether  a  mere  wagering 
policy  was  valid,  the  decision  would,  I  think,  have  been  different. 
The  case  itself  shows  the  court  to  have  supposed  that  the  plaintiff 
actually  had  an  interest;  and  it  is  apparent,  from  the  authorities 
that  it  had  always  been  previously  held,  in  suits  upon  policies  not 
containing  the  words:  "interest  or  no  interest"  or  other  equivalent 
words,  that  the  plaintiff  must  aver  and  prove  that  he  had  an  interest. 
This  is  distinctly  asserted  by  Lord  Hardwicke,  in  the  case  of  Sadler's 
Company  v.  Babcock  (supra) ;  and  in  the  case  of  Crauford  v.  Hunter 
(8  Term,  14),  the  counsel,  on  looking  into  the  precedents  at  the  request 
of  the  court,  found  that  it  had  been  the  uniform  practice,  in  suits 
upon  marine  policies,  to  insert  an  averment  of  interest.  To  me,  there- 
fore, it  seems  clear,  that  the  decision  in  Depaba  v.  Ludlow  was  made 
because  the  court  failed  to  distinguish  between  a  waiver  of  proof  at 
the  trial,  which  the  defendant  was,  of  course,  at  liberty  to  make,  and 


28  LAW  AND  BUSINESS 

a  waiver  in  the  policy  itself,  by  which  it  was  converted  into  a  mere 
wager. 

In  consequence  of  this  case,  and  others  which  followed  it,  Parlia- 
ment was  forced  to  interfere,  as  it  did,  by  the  act  of  19  George  II 
(chap.  37),  reciting  the  mischiefs  which  had  arisen  from  the  making 
of  marine  insurances,  "interest  or  no  interest,"  and  prohibiting  them 
thereafter;  and  when  the  question  subsequently  arose  in  Crauford 
v.  Hunter  (supra)  as  to  the  validity  at  common  law  of  a  mere  wagering 
policy  upon  a  ship,  it  was  held  to  be  valid,  solely  upon  the  authority 
of  the  recitals  in  this  act.  It  was  in  this  indirect  way  that  the  doctrine 
in  question,  as  to  marine  policies,  first  crept  into  the  law.  It  was 
important  to  show  this,  because  the  effect  of  what  I  consider  as  the 
inadvertence  of  the  court  in  Depaba  v.  Ludlow  was  not  confined  to 
policies  upon  ships.  It  must  have  been,  I  think,  in  consequence  of 
the  doctrine  initiated  by  that  case,  that  it  came  to  be  understood  in 
England  that,  in  insurance  upon  lives,  it  was  not  necessary  at  common 
law  that  the  party  to  be  benefited  by  the  policy  should  have  any 
interest  in  the  life  insured.  There  may  not  have  been  any  direct 
decision  to  that  effect;  yet,  that  such  was  the  prevalent  impression,  is 
to  be  inferred  from  the  enactment  of  the  statute  of  14  George  III 
(chap.  48),  prohibiting  insurance  upon  lives  where  the  person  insuring 
had  no  interest  in  the  life.  Angell,  in  speaking  of  this  statute,  says: 
"At  common  law  it  seemed  to  have  been  thought  unnecessary  that, 
at  the  time  of  effecting  the  policy,  the  assured  should  have  had  any 
interest  which  might  be  prejudiced  by  the  happening  of  the  event 
insured  against."  (Angell  on  Life  and  Fire  Ins.,  sec.  297.)  In  New 
Jersey  they  have  no  such  statute;  and  the  question  now  to  be  decided, 
therefore,  is,  whether  the  impression  which  seems  to  have  prevailed 
in  England  prior  to  the  statute  of  14  George  III  was  well  founded. 

That  impression  does  not  appear  to  be  supported  by  any  adjudged 
case.  Life  insurance  seems  not  to  have  been  practiced  to  a  great 
extent  in  England  until  a  comparatively  modern  date,  and  the 
probability  is,  that  as  soon  as  such  insurance  became  frequent,  the 
evils  of  gambling  in  them  was  so  apparent  that  Parliament  interposed, 
upon  the  assumption  that  the  same  rule  would  be  applied  to  them  as 
to  insurances  upon  ships.  I  cannot  regard  that  act  as  affording 
any  very  strong  evidence,  that,  at  common  law,  wagering  policies 
upon  lives  were  valid.  It  seems  to  me,  that,  were  the  naked  question 
presented,  whether  such  a  policy  comes  within  the  admitted  exception 
to  the  validity  of  wagers  in  general,  that  is,  whether  it  is  repugnant 


DEVICES  FOR  SHIFTING  RISKS  29 

to  a  sound  public  policy,  no  court,  not  hampered  by  some  unfortunate 
or  mistaken  precedent,  would  hesitate  for  a  moment  in  holding  the 
affirmative. 

In  Massachusetts,  in  Vermont,  in  Pennsylvania,  and  I  believe 
other  states,  it  has  been  so  held  in  regard  to  wager  policies  in  general. 
But  policies  without  interest,  upon  lives,  are  more  pernicious  and 
dangerous  than  any  other  class  of  wager  policies;  because  temptations 
to  tamper  with  life  are  more  mischievous  than  incitements  to  mere 
pecuniary  frauds. 

Chancellor  Kent  was  evidently  embarassed  by  the  position  of  this 
question  in  England.  He  commences  his  remarks  on  the  subject 
by  saying  that  "  the  party  insuring  must  have  an  interest  in  the  life 
insured,"  and  then  immediately  refers  to  the  English  statute,  of 
14  George  III,  chapter  48,  but  says  not  a  word  upon  the  question 
whether  at  common  law  an  interest  was  necessary.  He,  however, 
concludes  by  saying  that  "the  necessity  of  an  interest  in  the  life  insured, 
in  order  to  support  the  policy,  prevails  generally  in  this  country, 
because  wager  contracts  are  almost  universally  held  to  be  unlawful, 
either  in  consequence  of  some  statute  provision,  or  upon  principles 
of  the  common  law."  (3  Kent.  Com.,  368.) 

This  obscure  manner  of  treating  the  subject  is  plainly  to  be 
attributed  to  the  reluctance  of  the  learned  author  to  admit  (notwith- 
standing the  impression  that  appears  to  have  obtained  in  England) 
that  gambling  in  life  insurance  could  be  tolerated  at  common  law. 
That  impression  has  been  here  traced,  as  I  think,  with  justice  to  the 
very  questionable  doctrine  of  the  English  courts  in  regard  to  marine 
policies.  It  has  never,  that  I  am  aware  of,  been  recognized  and 
adopted  by  any  American  court,  and  is  so  obviously  repugnant  to  the 
plainest  principles  of  public  policy  that  it  is  somewhat  surprising 
that  it  should  ever  have  existed.  My  conclusion,  therefore  is,  that 
the  statute  of  14  George  III,  avoiding  wager  policies  upon  lives  was 
simply  declaratory  of  the  common  law,  and  that  all  such  policies 
would  have  been  void,  independently  of  that  act. 

It  is  said  that  the  defendants,  by  issuing  the  policy  upon  the 
representation  of  the  plaintiff  that  he  had  an  interest,  have  admitted 
his  interest,  and  that  the  production  of  the  policy  is  at  least  prim  a 
facie  evidence  of  such  interest.  This  position  cannot  be  sustained. 
All  the  older  authorities  show,  that  even  in  actions  upon  marine 
policies,  not  containing  the  clause  "interest  or  no  interest,"  it  was 
necessary  to  aver,  and  of  course  to  prove,  the  interest  of  the  plaintiff. 


30  LAW  AND  BUSINESS 

It  is  an  indispensable  part  of  the  plaintiff's  case,  to  be  made  out 
affirmatively  at  the  trial.  Upon  this  ground,  therefore,  as  well  as 
that  before  considered,  the  judgment  of  the  Supreme  Court  for  the 
plaintiff  must  be  reversed;  and  there  must  be  a  new  trial,  with  costs 
to  abide  the  event. 

QUESTIONS 

1.  What  is  the  essence  of  a  gambling  or  wagering  contract  ?    Were  wager- 
ing contracts  enforcible  at  common  law?    What  objections  may  be 
urged  against  their  enforcibility  ? 

2.  In  case  the  insured  has  no  interest  in  the  subject-matter  of  the  insurance 
contract,  is  there  any  question  of  shifting  risks?    If  not,  is  there  any 
justification  at  all  for  enforcing  such  contracts  ? 

3.  Even  when  a  person  has  an  interest  in  the  subject-matter  of  an  insur- 
ance contract,  what  is  the  justification  for  contracts  by  which  one 
shifts  his  risks  to  another  ? 

4.  Do  the  various  forms  of  risk-bearing  eliminate  the  number  or  intensity 
of  risks  ?    If  not,  what  defense  can  be  made  for  permitting  one  person 
to  shift  his  risks  to  another  ? 

5.  It  is  sometimes  urged  that  one  inevitable  result  of  vicarious  risk-bearing 
is  a  tendency  toward  lower  standards  of  care  over  life  and  property. 
Is  this  true  ?    If  so,  are  there  any  safeguards  against  this  tendency  ? 

6.  Assuming  that  risk-bearing  devices  place  a  premium  on  low  standards  of 
care,  are  there  yet  more  serious  risks  which  are  avoided  ?    If  so,  what 
are  they  ? 

7.  P  applies  for  insurance  on  the  house  of  X  and  informs  the  company  that 
he  has  no  interest  in  the  building.    The  company,  however,  issues  the 
policy  to  him.    For  six  months,  P  pays  premiums  on  the  policy,  when 
the  house  is  accidentally  destroyed  by  fire.    P  sues  on  the  policy.    The 
company  contends  that  the  policy  is  void  because  P  had  no  insurable 
interest  in  the  property.    P  replies  that  D  is  estopped  to  deny  his 
lack  of  insurable  interest.    What  decision  ? 

FOLEY  v.  THE  MANUFACTURERS'  FIRE  INSURANCE 
COMPANY 

152  New  York  Reports  131  (1897) 

Appeal  from  a  judgment  of  the  General  Term  of  the  Supreme 
Court  in  the  fourth  judicial  department,  entered  November  30,  1894, 
which  affirmed  a  judgment  in  favor  of  plaintiffs  entered  upon  a  verdict. 

This  action  was  brought  by  plaintiffs  upon  a  policy  of  insurance 
to  recover  damages  alleged  to  have  been  caused  by  fire  to  three 
dwelling  houses  in  process  of  construction  for  them. 


DEVICES  FOR  SHIFTING  RISKS  31 

ANDREWS,  C.  J.  The  sole  question  in  this  case  is  whether 
the  plaintiffs  had  an  insurable  interest  equal  to  the  full  value  of  the 
incomplete  buildings  in  course  of  construction  on  their  lot  when  the 
fire  occurred.  It  is  the  contention  on  the  part  of  the  defendant  that^ 
as  the  houses  were  being  constructed  under  a  contract  by  which  the 
contractors  were  to  furnish  the  materials  and  build  the  houses  (above 
the  foundations)  and  to  complete  them  by  a  time  specified,  which  had 
not  expired  at  the  time  of  the  fire,  for  a  specified  sum  to  be  paid 
within  ten  days  after  their  completion,  the  plaintiffs  had  no  interest 
to  protect  in  the  structures  while  in  their  incomplete  state,  since  their 
destruction  by  fire  would  be  the  loss  of  the  contractors  and  not  of  the 
owners,  whose  obligation  to  build  and  complete  the  houses,  as  the 
condition  of  payment,  would  continue  after  as  before  the  fire.  It  may 
be  admitted  that  the  contractors  would  remain  bound  by  the  contract, 
notwithstanding  the  destruction  of  the  buildings  by  fire,  and  the 
owners  would  not  be  bound  to  pay  for  the  work  done  or  materials 
supplied  up  to  the  time  of  the  fire.  (Tompkins  v.  Dudley,  25  N.Y. 
272.)  The  contention  of  the  defendant  rests  upon  a  misconception 
of  the  insurer's  contract  and  as  to  the  insurable  interest  of  the  plaintiffs 
in  the  structures.  The  defendant,  by  its  contract,  undertook  to  insure 
the  plaintiffs  against  loss  by  fire,  not  exceeding  the  sum  specified  to 
the  "described  property,"  the  loss  or  damage  to  be  ascertained 
" according  to  the  actual  cash  value"  of  the  property  at  the  time  of 
the  fire.  The  parties  by  this  contract  made  the  value  of  the  property 
insured,  within  the  limit,  the  measure  of  the  insurer's  liability.  It  is 
an  undoubted  principle  of  fire  insurance  that  there  must  be  an  insurable 
interest  or  an  insurable  interest  which  he  represents  in  the  subject  of 
insurance,  existing  at  the  time  of  the  happening  of  the  event  insured 
against  to  enable  him  to  maintain  an  action  on  a  fire  policy.  This  flows 
from  the  nature  of  the  contract  of  fire  insurance  which  is  a  contract  of 
indemnity;  and  where  there  is  no  interest  there  is  no  room  for  indem- 
nity. The  plaintiffs  had  an  interest  in  the  subject  of  insurance  both 
at  the  inception  of  the  contract  and  at  the  time  of  the  fire.  They 
owned  the  land  upon  which  the  structures  were  being  erected.  They 
themselves  had  constructed  the  foundations  of  the  buildings,  and 
in  describing  the  property  insured,  the  foundations  were  specifically 
named.  They  were  in  possession  of  the  premises,  and  the  ownership 
of  the  fee  of  the  land  on  which  the  contractors  were  erecting  the 
buildings  carried  with  it  the  ownership  of  the  structures  as  they  pro- 
gressed, which,  according  to  the  general  rule  of  law,  became  part  of 


32  LAW  AND  BUSINESS 

the  realty  by  annexation.  It  is  not  claimed,  nor  could  it  upon  the 
evidence  be  claimed,  that  there  was  any  intention  either  on  the  part 
of  the  owners  or  the  contractors  to  sever  the  ownership  of  the 
structure  from  the  ownership  of  the  land  while  the  work  was  in  prog- 
ress or  that  the  contractors  should  retain  the  title  to  the  materials 
put  into  the  buildings  until  their  completion.  The  defendant  is 
compelled  to  admit  that  the  loss  sued  for  is  within  the  exact  terms  of 
the  policy.  It  is  conceded  that  the  recovery  does  not  exceed  the 
property  loss  occasioned  by  the  fire,  and  if  counsel  can  be  deemed  to 
have  denied  that  the  legal  ownership  of  the  structures  was  in  the 
owners  of  the  land  at  the  time  of  the  fire,  the  denial  is  very  indistinct 
and  certainly  is  not  justified  by  the  facts  or  the  law.  The  defense 
comes  to  this:  That  as  the  plaintiffs,  by  their  contract  with  third 
persons,  have  imposed  upon  them  the  risk  and  expense  of  furnishing 
complete  structures,  and  have  assumed  no  liability  until  the  structures 
are  completed,  they  had  no  insurable  interest  and  have  sustained  no 
loss.  But  the  contract  relations  between  the  plaintiffs  and  the 
contractors  is  a  matter  in  which  the  defendant  has  no  concern.  When 
the  policy  was  issued  it  could  not  be  known  whether  the  contractors 
would  perform  their  contract.  If  they  abandoned  it  the  owners 
would  derive  such  advantage  as  would  accrue  from  the  partial  con- 
struction of  the  buildings  prior  to  such  abandonment.  It  is  possible 
that  if  the  defendant  is  compelled  to  pay  the  policy  the  plaintiffs  may, 
if  they  insist  upon  their  rights  against  the  contractors,  get  double 
compensation,  unless  they  should  be  adjudged  to  hold  the  fund 
recovered  for  the  contractors.  But,  however  this  may  be,  the  owners 
had  an  insurable  interest  to  the  whole  value  of  the  buildings  on  their 
land,  and  the  defendant  neither  can  compel  the  plaintiffs  to  put  the 
loss  on  the  contractors,  nor  can  they  resort  to  the  terms  of  the  building 
contract  to  diminish  the  liability  from  an  actual  loss  within  the  terms 
of  the  policy. 

The  fact  that  improvements  on  land  may  have  cost  the  owner 
nothing,  or  that  if  destroyed  by  fire  he  may  compel  another  person 
to  replace  them  without  expense  to  him,  or  that  he  may  recoup  his 
loss  by  resort  to  a  contract  liability  of  a  third  person,  in  no  way  affects 
the  liability  of  an  insurer,  in  the  absence  of  any  exemption  in  the 
policy.  (See  Clover  v.  Greenwich  Insurance  Co.,  101  N.Y.  277; 
Kernocnan  v.  N.Y.  Bowery  F.  Insurance  Co.,  17  idem  428;  Riggs  v. 
CM.  Insurance  Co.,  125  idem  7-,  International  Trust  Co.  v.  Boardman, 
149  Mass.  158.) 

The  judgment  should  be  affirmed. 


DEVICES  FOR  SHIFTING  RISKS  33 

QUESTIONS 

1 .  The  court  permitted  the  plaintiffs,  in  the  principal  case,  to  recover  from 
the  insurer.     Suppose  now  that  the  plaintiffs  sue  the  contractors  for 
their  failure  to  complete  the  building.    What  decision  ? 

2.  Suppose  that  the  contractors  had  effected  insurance  on  the  incompleted 
building,  would  they  have  been  permitted  to  recover  from  the  insur- 
ance company  ? 

3.  T  is  trustee  of  a  house  and  lot  for  C.     (a)  What  insurable  interest,  if 
any,  does  T  have  in  the  building  ?     (b)  What  insurable  interest,  if  any, 
does  C  have  in  the  building  ? 

4.  P  executes  a  mortgage  on  a  house  and  lot  to  M  to  secure  a  debt, 
(a)  Does  P  have  an  insurable  interest  in  the  building  ?     (b)  Does  M  have 
an  insurable  interest  in  the  building  ? 

5.  X  conveys  a  house  and  lot  to  P  for  life,  remainder  to  M  in  fee.     (a)  Does 
P  have  an  insurable  interest  in  the  house  ?     (b)  Does  M  have  an  insur- 
able interest  in  it  ? 

6.  X  leases  land  to  P  for  a  period  of  ninety  years.     P  erects  a  building  on 
the  land,  with  the  understanding  that  the  building  is  to  become  the 
property  of  X,  on  the  termination  of  the  lease,     (a)  Does  X  have  an 
insurable  interest  in  the  building?     (b)  Does  P  have  an  insurable 
interest  in  the  building  ? 

7.  X  leases  a  house  and  lot  to  P  for  a  period  of  three  years.    P  insures 
the  building.    In  an  action  on  the  policy,  the  insurer  contends  that  P 
cannot  recover  because  he  has  no  insurable  interest.    What  decision  ? 

8.  P  is  contemplating  the  purchase  of  a  certain  house  and  lot  from  X.     In 
anticipation  of  this,  he  effects  insurance  on  the  property.    The  house 
burns  after  the  purchase  is  made.    P  sues  the  insurer  on  the  policy. 
What  decision  ? 

9.  In  the  foregoing  case,  X  had  insurance  on  the  building,  which  he  effected 
prior  to  the  transaction  in  question.    X  brings  an  action  against  the 
insurer  for  the  loss.    What  decision  ? 

10.  P,  a  merchant,  takes  out  a  policy  of  insurance  on  his  stock  in  trade  for 
the  year  1922.  In  the  latter  part  of  the  year,  the  building  and  all  its 
contents  were  burned.  P  sues  the  insurer  for  the  loss.  The  insurer 
contends  that  P  cannot  recover  because  the  goods  burned  were  not  in 
stock  when  the  contract  was  made.  What  decision  ? 

WAINER  v.  MILFORD  MUTUAL  FIRE  INSURANCE 
COMPANY 

153  Massachusetts  Reports  335  (1891) 

Contract  upon  a  policy  of  insurance,  in  the  form  prescribed  by 
the  Pub.  Sts.,  Sts.  c.  119,  sec.  139  (St.  1887,  c.  214,  sec.  60),  against 


34  LAW  AND  BUSINESS 

loss  by  fire.  At  the  trial  in  the  Superior  Court  before  MASON,  C.  J., 
the  plaintiff  submitted  the  case  upon  the  report  of  an  auditor,  and  the 
judge  ordered  a  verdict  for  the  defendant,  and  reported  the  case  for 
the  determination  of  this  court.  If  upon  the  facts  a  finding  would 
be  warranted  for  the  plaintiff,  the  verdict  was  to  be  set  aside  and  a 
verdict  entered  for  the  plaintiff  for  a  sum  agreed;  otherwise,  the 
verdict  was  to  stand.  The  facts  appear  in  the  opinion. 

W.  ALLEN,  J.  There  are  two  grounds  presented  by  the  auditor's 
report  on  which  the  defendant  contends  that  the  policy  was  void; 
first,  that  the  building  had  been  vacant  for  more  than  thirty  days 
before  the  loss,  and  during  the  continuance  of  the  policy;  and 
secondly,  that  the  plaintiff  was  not  the  sole  owner  of  the  property. 

We  think  that  the  plaintiff  had  an  insurable  interest  in  the  entire 
property  to  its  full  value,  and  that  his  answer  that  he  owned  it  was 
a  fair  representation  of  the  fact.  The  plaintiff  and  his  brother  had 
been  tenants  in  common  in  fee  of  the  property.  Five  years  before 
the  insurance  the  plaintiff  bought  of  his  brother  his  undivided  interest 
by  an  oral  contract,  and  paid  the  full  consideration,  the  brother 
promising  to  make  and  deliver  a  deed.  The  plaintiff  went  into 
exclusive  possession  of  the  whole,  and  has  continued  in  such  possession 
since,  claiming  title.  His  brother  never  disputed  his  title,  or  refused 
to  give  a  deed,  and  a  week  after  the  fire  made  a  deed  in  pursuance  of 
his  promise.  It  is  said  that  the  plaintiff  had  no  insurable  interest 
in  the  undivided  half,  because  he  could  not  enforce  the  oral  contract, 
and  had  no  legal  or  equitable  title  to  the  premises. 

An  insurable  interest  in  property  need  not  necessarily  be  a  right 
in  it  which  can  be  legally  enforced.  We  are  by  no  means  prepared  to 
hold  that  a  jury  could  not,  upon  the  facts  found  by  the  auditor, 
have  found  such  part  performance  of  the  contract  by  the  plaintiff's 
brother  that  it  could  have  been  specifically  enforced  against  him. 
But  we  do  not  think  that  it  is  necessary  to  show  an  insurable  interest 
which  may  .be  called  ownership.  Insurance  against  loss  by  fire  is  a 
personal  contract  of  indemnity.  If  a  person  has  such  an  interest  in 
property  that  he  will  suffer  pecuniary  loss  by  its  destruction,  he  has 
an  insurable  interest.  A  valid  contract  for  its  purchase  is  such  an 
interest.  It  has  been  said  that  a  contract  for  purchase  which  is  made 
incapable  of  enforcement  by  the  statute  of  frauds  is  not  itself  such  an 
interest,  because  the  purchaser  cannot  be  compelled  to  pay  the  price, 
and  so  would  lose  nothing  by  the  destruction  of  the  property.  But  it 
has  been  held  that  such  a  contract  is  a  valid  subsisting  contract  which 


DEVICES  FOR  SHIFTING  RISKS  35 

may  be  carried  out  between  the  parties,  and  constitutes  an  insurable 
interest  in  the  property.  Amsinck  v.  American  Insurance  Co.,  129 
Mass.  185. 

There  was  not  only  that  interest  in  the  case  at  bar,  but  the  4is= 
tinct  and  more  satisfactory  interest,  that  the  plaintiff  had  fully 
executed  the  contract  on  his  part,  and  had  paid  the  entire  purchase 
money,  and  would  suffer  the  same  loss  by  the  destruction  of  the 
buildings  as  if  he  had  the  legal  title.  The  only  answer  to  the  proposi- 
tion that  this  pecuniary  interest  in  the  house  was  the  same  as  that 
of  legal  owner  is,  that  he  could  not  hold  it  against  his  brother.  But 
this  does  not  affect  the  fact  that  the  destruction  of  the  house  would 
destroy  what  he  held  as  the  full  value  of  the  purchase  money  he  had 
paid,  and  it  amounts  to  nothing  more  than  saying  that  his  title 
was  defective.  He  had  been  in  possession  for  five  years  under 
claim  of  title,  paying  taxes,  and  receiving  the  rents  and  profits.  If 
he  held  as  disseisor,  no  question  would  be  made  that  he  had  an 
insurable  interest  which  could  be  properly  described  as  ownership. 
His  interest  was  more  real  and  valuable  than  if  he  held  merely  as 
disseisor;  he  added  to  the  direct  pecuniary  interest,  and  to  possession 
under  claim  of  title,  the  fact  that  the  contract  had  been  in  part 
executed  by  the  other  party  by  submitting  to  the  exclusive  occupancy 
of  the  plaintiff,  and  the  strong  probability  that  it  would  be  fully 
carried  out  on  request.  To  this  is  to  be  added  the  fact  that,  as 
in  Amsinck  v.  American  Insurance  Co.}  supra,  it  was  in  fact  carried 
out  before  the  commencement  of  the  action.  We  think  that  the 
plaintiff,  whether  he  could  or  could  not  have  compelled  specific 
performance  of  the  contract,  had  an  insurable  interest  in  the  property 
to  its  full  value,  and  properly  described  himself  as  owner,  and  is 
entitled  to  recover  the  full  amount.  Strong  v.  Manufacturers1 
Insurance  Co.,  10  Pick.  40;  Curry  v.  Commonwealth  Insurance  Co., 
10  Pick.  535;  Fletcher  v.  Commonwealth  Insurance  Co.,  18  Pick.  419; 
Putnam  v.  Mercantile  Insurance  Co.,  $  Met.  386;  Converse  v.  Citizens 
Insurance  Co.,  10  Gush.  37;  Eastern  Railroad  v.  Relief  Insurance  Co., 
98  Mass.  420;  Williams  v.  RogerWilliams  Insurance  Co.,  107  Mass.  377. 

According  to  the  terms  of  the  report,  there  must  be  judgment  for 
the  plaintiff  for  seven  hundred  dollars,  and  interest  from  the  date 
of  the  writ. 

Judgment  for  the  plaintiff. 


36  LAW  AND  BUSINESS 

QUESTIONS 

1.  What  was  the  insurable  interest  of  the  plaintiff  in  the  principal  case? 
Would  his  rights  in  the  property  have  been  enforced  in  law  or  in  equity  ? 

2.  X,  in  writing,  contracts  to  convey  a  house  and  lot  to  P.    What  are  P's 
rights  against  X  on  the  contract  ?    Does  P  have  an  insurable  interest 
in  the  property  ?    Does  X  have  an  insurable  interest  in  it  ? 

3.  X  orally  agrees  to  convey  a  house  and  lot  to  P.    What  are  P's  rights  on 
the  promise?    Does  he  have  an  insurable  interest  in  the  property? 

4.  X  orally  agrees  to  sell  a  house  and  lot  to  P.    P  pays  the  full  purchase 
price  and  goes  into  possession  of  the  property.    He  effects  insurance 
on  the  house.    What  decision  in  an  action  on  the  policy  for  a  loss  by  fire  ? 

5.  P  goes  into  possession  of  property  which  he  does  not  own  but  which  he 
holds  and  claims  as  owner.    H  erects  a  house  on  the  land  and  takes 
out  insurance  on  it.    What  decision  in  an  action  by  P  on  the  policy  ? 

6.  X  by  fraud  induces  P  to  convey  to  him  a  house  and  lot.    Does  P  have 
an  insurable  interest  in  the  house  after  the  transaction  ?    Does  X  have 
an  insurable  interest  in  the  property  ? 

7.  P  executes  a  mortgage  on  Blackacre  to  M  to  secure  a  debt  of  $5,000  which 
he  owes  to   M.    M  assigns  his  claim  to  A.    P  sells  the  mortgaged 
premises  to  B,  who  agrees  to  pay  the  debt.    Which  of  the  foregoing 
parties,  if  any,  has  any  insurable  interest  in  a  house  which  stands  on 
Blackacre  ? 

CREED  v.  THE  SUN  FIRE  OFFICE  OF  LONDON 
101  Alabama  Reports  522  (1893) 

COLEMAN,  J.  The  next  proposition  involves  a  question  new  in 
this  state.  Has  a  creditor  an  insurable  interest  in  a  building,  the 
property  of  the  estate  of  his  deceased  debtor,  which  may  be  subjected 
to  his  debt,  the  personal  property  being  insufficient  to  pay  the  debts 
of  the  estate  ?  After  much  deliberation  our  conclusion  is  that  he  has 
an  interest  which  may  DC  insured.  We  concede  and  affirm  that  a 
simple  contract  creditor,  without  a  lien,  either  statutory  or  contract, 
without  a,  jus  in  re  or  jus  ad  rem,  owning  a  mere  personal  claim  against 
his  debtor,  has  not  an  interest  in  the  property  of  his  debtor.  Such 
contracts  are  void  as  being  against  public  policy.  We  do  not  think 
the  principle  applies  after  the  death  of  the  debtor,  as  to  property 
liable  for  the  debt  and  which,  if  destroyed,  will  result  in  the  loss  of 
the  debt.  The  real  estate  as  well  as  the  personal  property  of  a 
deceased  debtor  is  liable  for  his  debts  but  the  real  estate  cannot  be 
subjected  to  the  payment  of  his  debts  until  after  the  personalty  has 
been  exhausted.  After  the  death  of  the  debtor  the  debt  is  no  longer 


DEVICES  FOR  SHIFTING  RISKS  37 

enforceable  in  personam.  The  proceedings  to  reach  the  property  of 
the  estate  of  the  deceased  debtor  are  in  rem.  The  property  of 
the  debtor  takes  the  place  of  the  debtor  and  becomes,  as  it  were,  the 
debtor.  Whoever  knowingly  receives  the  property  of  a  deceased- 
debtor  and  wrongfully  converts  it,  is  answerable  to  the  creditor. 
3  Brick.  Dig.  464,  sec.  148;  Ib.,  465,  sec.  162. 

The  relation  of  creditor  and  debtor  invests  the  creditor  with  an 
insurable  interest  in  the  life  of  his  debtor  to  the  extent  of  his  debt. 
Alexander  v.  Sanders,  93  Ala.  345,  9  So.  Rep.  388;  n  Amer.  &  Eng. 
Encyc.  of  Law,  p.  319.  It  would  seem  upon  like  principles  that 
when  the  property  becomes  directly  subject  to  proceedings  in  rem 
for  the  satisfaction  of  the  debt,  the  creditor  should  become  invested 
with  an  insurable  interest  in  the  property.  Certainly  if  a  creditor 
cannot  obtain  satisfaction  of  his  debt  from  the  personal  property  of 
his  deceased  debtor,  and  has  a  legal  right,  which  cannot  be  defeated, 
to  enforce  its  collection,  by  proceedings  in  rem  against  a  building 
belonging  to  the  estate  of  the  deceased  debtor,  and  if  it  be  true  that 
the  destruction  of  the  building  by  fire  would  immediately  and  neces- 
sarily result  in  pecuniary  loss,  the  loss  being  the  direct  consequence  of 
the  fire,  the  creditor  has  an  interest  in  the  protection  of  the  building. 
He  has  no  lien  as  in  the  case  of  a  mortgagee,  nor  such  lien  as  the 
statute  may  confer  on  an  attaching  or  execution  creditor,  but  his  right 
to  subject  the  specific  property  to  his  debt  invests  him  with  an  interest 
but  little  less,  if  any,  than  that  of  the  attaching  or  execution  creditor 
or  mortgagee.  In  the  case  of  Herkimer  v.  Rice,  27  N.Y.  163,  the 
question  arose  as  to  whether  an  administrator  of  an  insolvent  estate 
held  an  insurable  interest  in  the  real  estate  of  the  deceased  debtor. 
The  court  (DENIO,  C.  J.  rendering  the  opinion)  held  that  he  did, 
and  the  conclusion  was  based  in  great  part  upon  the  proposition,  that 
the  creditors  had  such  an  interest,  which  the  administrator  could 
protect  by  insurance  for  them.  We  think  whatever  could  be  done 
by  an  administrator  for  the  creditor  in  this  respect,  could  be  done 
directly  by  the  creditor  for  himself.  Rohrbach  v.  The  German  Fire 
Insurance  Co.,  62  N.Y.  47.  Other  reasons  might  be  given,  but  we 
are  of  the  opinion  these  are  sufficient  to  show  that  the  creditor  of 
a  deceased  debtor,  whose  estate  is  insufficient  to  pay  the  debts,  has 
an  insurable  interest  in  the  property  of  the  estate,  which  by  law 
may  be  subjected  by  proceedings  in  rem  to  the  payment  of  the  debts. 
The  recovery  cannot  exceed  the  amount  of  the  insurable  interest. 


38  LAW  AND  BUSINESS 

QUESTIONS 

1.  After  having  recovered  a  judgment  against  D,  his  debtor,  C  effects 
insurance  on  a  house  belonging  to  D.    The  house,  with  the  lot  on  which 
it  stands,  is  the  only  property  which  D  has.    The  house  burns.    The 
value  of  the  lot  is  insufficient  to  satisfy  the  judgment.    P  sues  the 
insurer  for  the  loss.    What  decision  ? 

2.  P  recovers  a  judgment  against  X.    By  virtue  of  the  judgment  a  levy 
is  made  on  X's  house  and  lot.    Thereupon,  P  effects  insurance  on  the 
house.    Before  a  sale  under  the  levy  is  made  the  house  burns.    What 
decision  in  an  action  by  P  against  the  insurer  on  the  contract  ? 

3.  In  some  states,  it  is  provided  by  statute  that  the  rendition  of  a  judg- 
ment gives  the  judgment  creditor  a  lien  on  the  debtor's  property  located 
in  the  county  in  which  the  judgment  is  entered.    Does  a  judgment 
creditor,  in  a  state  where  such  a  statute  exists,  have  an  insurable  interest 
in  the  property  of  his  debtor  ? 

4.  D  owes  P  $5,000.    D  is  practically  insolvent  and  owns  nothing  but  a 
house  and  lot,  reasonably  worth  $4,000.    P  effects  insurance  on  the 
house  to  its  full  value.    What  are  his  rights  on  the  policy  in  the  event  of 
the  destruction  of  the  house  by  fire  ? 

5.  P  sells  a  consignment  of  goods  to  X  on  credit  and  remains  in  possession 
of  them,     (a)  Has  P  an  insurable  interest  in  the  goods  ?     (b)  Has  X  an 
insurable  interest  in  them  ? 

6.  P  sells  a  house  and  lot  to  X.    X  gave  his  notes  for  the  purchase  price. 
(a)  Has  P  an  insurable  interest  in  the  house  ?     (b)  Has  X  an  insurable 
interest  in  it  ? 

WARREN  v.  THE  DAVENPORT  FIRE  INSURANCE  CO. 
31  Iowa  Reports  464  (1871) 

MILLER,  J.  The  question  raised  by  the  demurrer  is,  whether  the 
parties  effecting  the  insurance  in  this  case  had  an  insurable  interest 
in  the  property  insured,  at  the  time  the  risk  was  taken  and  at  the 
time  of  loss  by  fire. 

Policies  of  insurance  founded  upon  mere  hope  and  expectation 
and  without  some  interest  are  said  to  be  objectionable  as  a  species  of 
gaming,  and  so  have  been  called  wager  policies.  These  policies  were 
expressly  prohibited  in  England  by  Statute  of  George  II,  chap.  37, 
and  they  have  been  adjudged  illegal  and  void  in  this  country  upon 
the  principles  of  that  statute.  Angell  on  Fire  &  Life  Insurance, 
sees.  1 8,  55.  It  is  not  that  wager  policies  are  without  consideration 
unequal  between  the  parties  that  they  are  held  void;  but  because 
they  are  contrary  to  public  policy.  Policies  of  fire  insurance,  without 
interest,  are  peculiarly  and  extremely  hazardous  by  reason  of  the 


DEVICES  FOR  SHIFTING  RISKS  39 

temptation  they  hold  out  to  the  commission  of  arson  by  the  party 
assured,  which  is  necessarily  attended  with  peril  of  the  most  deplor- 
able kind  to  a  whole  neighborhood.  In  King  v.  State  Mutual  Fire 
Insurance  Co.,  7  Cush.  (Mass.)  10,  Mr.  Chief  Justice  SHAW  says: 
"If  an  insurance  contract  were  made  on  a  subject  in  which  the  assured 
has  no  pecuniary  interest — although  in  other  respects  he  may  be  deeply 
concerned  in  it,  and  on  that  ground  be  willing  to  pay  a  fair  premium — 
made  with  full  knowledge  of  all  the  circumstances,  by  both  parties, 
without  coercion  or  fraud,  we  cannot  perceive  why  it  would  not  be 
valid  as  between  the  parties.  But  upon  the  strong  objections,  on 
grounds  of  public  policy  to  all  gaming  contracts,  and  especially  to 
contracts  which  would  create  a  temptation  to  destroy  life  or  property, 
such  policies  without  interest  are  justly  held  void."  Upon  the 
ground  of  public  policy,  therefore,  if  the  assured  have  no  interest 
in  the  thing  insured,  the  policy  must  be  held  void.  This  is  well  settled. 
On  the  other  hand,  it  is  equally  well  settled  that  not  only  the  absolute 
owner,  but  anyone  having  a  qualified  interest  in  the  property  insured, 
or  even  any  reasonable  expectation  of  profit  or  advantage  to  be  derived 
from  it,  may  be  the  subject  of  insurance  and  especially  if  it  be  founded 
in  some  legal  or  equitable  title.  Idem,  sec.  56.  And  the  general 
doctrine  that  any  interest  in  the  subject-matter  insured  is  sufficient 
to  sustain  an  insurance  upon  real  property  is  one  which  has  been  fully 
sustained.  Idem,  sec.  57,  and  notes.  Several  persons  owning 
different  interests  in  the  same  property  may  insure  their  several 
interests.  And  it  is  not  material  whether  the  interest  assured  be 
legal  or  equitable.  Any  interest  which  would  be  recognized  by  a 
court  of  law  or  equity  is  an  insurable  interest. 

The  interest  of  a  cestui  que  trust,  mortgagor,  mortgagee,  of  a 
lender  or  borrower  on  bottomry,  so  far  as  regards  the  surplus  value, 
or  of  a  captor,  or  of  one  entitled  to  freight  or  commissions,  is  insurable. 
So  where  a  lessor  on  ground  rent  has  entered  for  the  arrears,  under  a 
covenant  that  he  may  hold  until  the  arrears  are  paid,  etc.,  has  an 
insurable  interest.  So  also  in  case  of  one  in  possession  of  land  by 
disseisin.  Angell  on  Fire  and  Life  Insurance,  sees.  57,  58,  59;  2 
Parsons  on  Cont.,  sec.  2,  of  chap.  14,  commencing  on  p.  438,  and  cases 
cited;  2  Greenlf.  on  Ev.,  sec.  379. 

The  term  interest,  as  used  in  application  to  the  right  to  insure, 
does  not  necessarily  imply  property  (Hancock  v.  Fishing  Insurance 
Co.,  3  Summer's  C.C.  132;  Angell  on  Life  and  Fire  Insurance, 
sec.  56),  and  as  the  contract  of  insurance  is  one  of  indemnity  against 


40  LAW  AND  BUSINESS 

losses  and  disadvantages,  an  insurable  interest  may  be  proved  in 
the  assured,  without  the  evidence  of  any  legal  or  equitable  title  in 
the  property.  Putnam  v.  Mercantile  Insurance  Co.,  5  Mete.  386; 
Lazarus  v.  The  Commonwealth  Insurance  Co.,  19  Pick.  81,  98.  An 
"insurable  interest"  is  sui  generis,  and  peculiar  in  its  texture  and 
operation.  It  sometimes  exists  where  there  is  not  any  present 
property,  or  jus  in  re,  or  jus  ad  rem.  Yet  such  a  connection  must  be 
established  between  the  subject-matter  insured,  and  the  party  in  whose 
behalf  the  insurance  has  been  effected,  as  may  be  sufficient  for  the  pur- 
pose of  deducing  the  existence  of  a  loss  to  him  from  the  occurrence 
of  the  injury  to  it.  Buck  v.  Chesapeake  Insurance  Co.,  i  Pet.  163. 

In  the  case  under  consideration,  the  assured  were  stockholders  in 
the  Dubuque  Lumber  Co.,  a  corporation  for  pecuniary  profit.  The 
property  destroyed  belonged  to  the  corporation.  The  insurance 
was  upon  the  interest  which  the  assured  had  in  that  property  by 
virtue  of  the  capital  stock  therein  owned  by  them. 

The  object  of  the  insurance  was  to  indemnify  the  assured  against 
loss  to  them  in  the  event  of  a  destruction  of  the  property  by  fire. 
Could  or  would  they  sustain  loss  in  such  event?  How  would  their 
interest  be  affected?  It  seems  to  us  to  be  beyond  controversy, 
that,  in  case  of  the  destruction  of  the  corporate  property  by  fire, 
the  stockholders  sustain  loss  to  a  greater  or  less  extent,  dependent 
on  the  particular  circumstances.  Suppose  the  case  of  a  grain  elevator 
upon  some  one  of  our  numerous  railroad  lines,  built,  owned,  and 
managed  by  a  joint  stock  corporation;  that  this  is  the  only  property 
of  the  corporation;  that  the  entire  capital  stock  is  represented  in  and 
by  this  property;  that,  in  consequence  of  the  profitable  nature  of  the 
business,  large  dividends  are  realized  by  the  stockholders,  and  the 
stock  is  above  par  in  the  market.  The  destruction  of  this  property 
by  fire  would  at  once  result  in  the  loss  of  dividends  to  the  stockholders 
and  a  destruction  of  the  value  of  the  stock,  or  at  least  its  reduction 
to  a  nominal  value.  The  entire  property,  representing  the  whole 
capital  of  the  corporation,  being  destroyed,  it  is  difficult  to  perceive 
what  would  give  any  value  to  the  stock.  It  is  true  that,  primarily, 
the  loss  is  that  of  the  corporation  and  hence  it  may  insure,  but  the 
corporation  may  refuse  to  insure  and  then  the  real  and  actual  loss 
falls  on  the  stockholders. 

The  appellee  argues  that  shares  of  stock  in  a  corporation  are  choses 
in  action,  and  are  not  considered  to  be  an  interest  in  the  real  property 
of  the  company,  and  cites  numerous  authorities  to  sustain  this  position. 


DEVICES  FOR  SHIFTING  RISKS  41 

This  may  be  admitted  without  denying  the  shareholders'  "insurable 
interest"  in  the  property  of  the  corporation.  A  mortgage,  also,  is 
but  a  chose  in  action.  The  mortgagee  acquires  no  right  to  the 
mortgaged  property  which  can  be  attached,  levied  on  under  a  general 
execution  or  that  can  be  inherited.  It  is  a  mere  security  for  a  debt. 
Eaton  v.  Whitney,  3  Pick.  484;  Smith  v.  People's  Bank,  n  Shep. 
(Me.)  185;  Abbott  v.  Mutual  Fire  Insurance  Co.,  17  idem  414; 
Middleton  Savings  Bank  v.  Dubuque,  15  Iowa,  394;  Newman  v. 
DeLorimer,  19  idem  244;  Baldwin  v.  Thompson,  15  idem  504; 
Burton  v.  Hintrager,  18  idem  348;  Milliard  on  M ort.  215. 

And  yet  the  cases  are  uniform  to  the  effect  that  a  mortgagee  of 
real  property  has  an  insurable  interest  therein  which  he  may  insure 
on  his  own  account,  but  that  when  he  does  so  it  is  but  an  insurance  of 
his  debt.  Eaton  v.  Whitney,  supra.  And  in  case  of  damage  by  fire 
to  the  premises  before  payment  of  the  mortgage,  his  loss,  if  any,  is 
that  his  security  has  been  impaired  or  lost.  His  interest  is  but  a  chose 
in  action  in  the  nature  of  a  security,  which  he  may  insure,  so  that  in 
case  of  destruction  of  or  damage  to  the  property  upon  which  his 
security  rests,  he  will  be  indemnified  for  the  loss  he  actually  sustains. 
So,  also,  it  seems  to  us,  that  the  owner  of  stock  in  a  corporation  for 
pecuniary  profit  has  a  like  interest  in  the  corporate  property.  A 
mortgagee  of  real  property  has  an  insurable  interest  in  the  mortgaged 
premises,  based  upon  the  interest  he  has  in  the  preservation  of  the 
same  as  security  for  a  debt.  He  has  a  legal  right  to  contract  for 
indemnity  against  injury  to  the  value  of  his  security. 

Upon  precisely  the  same  principle  a  stockholder  may  contract 
for  indemnity  against  injury  to  the  value  of  his  stock,  for  he  also 
has  an  interest  in  the  preservation  of  the  corporate  property  from 
destruction  by  fire;  and  in  its  destruction  he  sustains  loss  in  so  far 
as  the  value  of  his  stock  is  depreciated  in  consequence  thereof,  or  his 
dividends  cut  off. 

The  argument,  that  if  this  is  allowed  owners  of  stock  worth  not 
more  than  10  per  cent  upon  its  nominal  value  may  be  insured  at  its 
par  value,  and  in  case  of  loss  by  fire  such  par  value  of  the  stock 
recovered  from  the  insurer,  seems  to  us  to  be  unsound.  Without 
entering  into  a  discussion  in  detail  of  what  would  be  the  exact  measure 
of  recovery  in  such  case,  we  simply  answer  that  no  more  than  the 
actual  loss  sustained  is  in  any  case  recoverable.  This  rule  is  well 
established,  and  rests  upon  just  principles.  See  Angell  on  Fire  and 
Life  Insurance,  chap,  n,  and  cases  cited  in  notes. 


42  LAW  AND  BUSINESS 

The  question  under  consideration  has  not  received  direct  judicial 
determination  in  any  of  the  states,  so  far  as  we  have  been  able  to 
discover.  The  case  of  Phillips  v.  Knox  County  Insurance  Co.,  20  Ohio, 
174,  is  cited  and  claimed  as  an  authority  against  the  right  of  the 
stockholder  to  insure.  The  decision  in  that  case,  as  a  careful  examina- 
tion of  the  same  fully  shows,  was  made  entirely  upon  a  construction 
of  the  charter  of  the  insurance  company,  which  gave  a  lien  on  the 
insured  property,  including  the  land  on  which  the  buildings  stand. 
By  the  charter  a  sale  of  the  insured  property  rendered  the  policy 
void,  and  the  ninth  section  declared,  that  if  the  insured  have  a  less 
estate  than  an  unincumbered  title  in  fee  simple  to  the  buildings 
insured  and  the  lands  covered  by  the  same,  the  policy  shall  be  void, 
unless  the  true  title  of  the  insured  and  the  incumbrances  be  expressed 
in  the  policy  and  in  the  application  therefor.  The  plaintiff  insured 
as  owner  of  the  property,  which  in  fact  belonged  to  a  corporation 
of  which  he  was  a  stockholder,  and  the  court  held  that  "where  a 
building  and  the  land  on  which  it  stands  is  the  property  of  an  incor- 
porated company,  the  stockholders  could  not,  under  the  provisions  of 
of  the  defendant's  charter,  insure  such  property  as  their  individual 
property  in  the  defendant's  company." 

Under  the  charter  of  that  company,  a  mortgagee  even,  insuring 
the  property  as  his  own,  would  likewise  be  defeated  in  a  recovery. 
So  the  owner  in  fee  simple  could  not  recover  if  the  property  was  incum- 
bered  and  the  incumbrance  not  set  forth  in  the  policy.  And  of  course 
the  same  result  must  follow  where  a  stockholder  insures  corporate 
property  as  his  own  individual  property.  The  decision  in  that  case 
goes  no  farther  than  this,  and  is  no  authority  in  support  of  the  propo- 
sition, that  a  stockholder  has  no  insurable  interest  in  the  property 
of  the  company,  and  hence,  has  no  bearing  upon  the  question  before  us. 
The  judgment  of  the  district  court  is  reversed. 

QUESTIONS 

1.  What  property  was  insured  in  this  case?    To  whom  did  it  belong? 
Did  the  plaintiff  have  legal  or  equitable  title  in  the  property  or  interest 
in  it? 

2.  P,  a  mere  intruder,  erects  a  building  on  X's  land  and  takes  out  insurance 
on  it.    The  building  burns  and  P  sues  the  insurer  for  the  loss.    What 
decision  ? 

3.  P  finds  valuable  personal  property  and  advertises  for  its  owner.    He 
effects  insurance  on  it  while  waiting  for  the  owner  to  disclose  himself. 
What  are  his  rights  under  the  policy  in  case  of  loss  ? 


DEVICES  FOR  SHIFTING  RISKS  43 

4.  As  a  favor  to  X,  P  agrees  to  take  possession  of  X's  silverware  while  X 
is  away  from  his  home.    P  takes  out  insurance  on  the  silverware  against 
burglary.   What  are  P's  rights  on  the  policy  in  case  the  property  is  stolen  ? 

5.  Would  your  answer  be  the  same  in  the  foregoing  case  if  P  were  a  hired 
bailee  of  the  property  ?    Would  your  answer  be  the  same  if  the  bailment 
had  been  for  P's  sole  benefit  ? 

6.  P  is  a  merchant  to  whom  goods  have  been  consigned  for  sale  on  com- 
mission.   While  the  goods  are  in  transit,  P  effects  insurance  on  them. 
This  is  an  action  on  the  policy.    The  insurer  contends  that  the  policy  is 
void  because  P  had  no  insurable  interest  in  the  goods.     What  decision  ? 

7.  P  is  in  possession  of  a  house  and  lot  belonging  to  X  as  a  tenant  at  will. 
What  insurable  interest,  if  any,  has  P  in  the  house  ? 

8.  X,  in  writing,  gratuitously  promises  to  convey  a  house  and  lot  to  P. 
P  immediately  effects  insurance  on  the  house,     (a)  Before  a  conveyance 
is  made,  the  house  burns.    What  are  P's  rights  on  the  policy  ?     (b)  After 
the  conveyance  is  made,  the  house  burns.    What  are  P's  rights  on  the 
policy  ? 

9.  X  makes  his  will  in  which  he  declares  that  all  his  property  shall  go  to  P. 
P  immediately  takes  out  insurance  on  a  certain  house  which  he  expects 
to  get.     (a)  Before  X  dies,  the  house  burns,     (b)  After  X  dies,  the 
house  burns.     What  are  the  rights  of  P  on  the  policy  under  each 
hypothesis  ? 

CRONIN  v.  VERMONT  LIFE  INSURANCE  COMPANY 

20  Rhode  Island  Reports  570  (1898) 

Assumpsit  on  a  policy  of  insurance  issued  upon  the  life  of  the 
plaintiff's  niece.  Heard  on  demurrer  to  the  declaration  setting  up 
lack  of  insurable  interest. 

STINESS,  J.  This  action  is  brought  to  recover  insurance  on  the 
life  of  the  plaintiff's  niece,  and  the  main  question  raised  by  the  defend- 
ant to  the  declaration  is  whether  the  plaintiff  had  an  insurable  interest 
in  the  life  of  her  niece. 

The  English  act  of  1774,  14  Geo.  Ill,  chap.  48,  sec.  i,  prohibited 
insurance  on  the  life  of  a  person  in  which  the  beneficiary  shall  have 
no  interest,  or  by  way  of  gaming  or  wagering. 

Although  the  statute  has  never  been  taken  as  a  part  of  our  law, 
its  rule  was  generally  followed  in  this  country,  as  declaratory  of  the 
common  law.  But  in  defining  the  term  "interest"  the  tendency  of 
the  decisions,  both  in  England  and  in  this  country  has  been  inclusive 
rather  than  exclusive. 

There  has  even  been  some  question  whether  insurance  without 
interest  should  be  held  to  be  void  on  the  ground  of  public  policy; 


44  LAW  AND  BUSINESS 

but,  in  this  state,  we  think  it  has  been  understood  to  be  settled,  since 
Mowry  v.  Homes  Insurance  Co.,  9  R.I.  346,  that  some  insurable 
interest- must  exist.  This,  too,  is  the  generally  accepted  rule. 

In  Clark  v.  Allen,  n  R.I.  439,  it  was  held  that  a  policy  valid  in  its 
inception,  could  be  transferred  to  a  bona  fide  purchaser,  even  though 
he  had  no  interest  in  the  life,  and  some  of  the  objections  to  such 
insurance,  on  the  ground  of  public  policy,  were  considered  and  shown 
to  be  fanciful  and  not  applied  to  other  branches  of  law.  For  example, 
the  element  of  chance  enters  into  annuities,  and  the  temptation  to 
shorten  life  in  order  to  hasten  the  possession  of  a  remainder-man, 
after  a  life  estate  in  real  property,  is  as  strong  as  in  the  case  of  a 
beneficiary  under  a  life  policy.  But  these  things  have  never  been 
considered  to  be  contrary  to  public  policy. 

Still,  upon  principle,  a  purely  speculative  contract  on  the  life  of 
another  is  as  objectionable,  on  the  grounds  of  public  policy,  as  a  like 
contract  in  regard  to  grain  or  stocks.  In  fact,  it  is  more  so,  and  such 
a  contract  may  properly  be  held  to  be  void. 

But  the  case  is  quite  different  when  one,  by  his  own  contract,  or 
even  in  the  name  of  another,  or  upon  the  ground  of  debt,  affection, 
or  mutual  interest  procures  insurance  for  the  benefit  of  another,  which 
is  really  to  stand  in  the  place  of  a  testamentary  gift.  And  so  kinship 
and  debt  have  come  to  be  recognized  as  sufficient  grounds  of  interest. 
Bliss  on  Life  Insurance,  2d  ed.,  sees.  12,  13;  i  May  on  Insurance, 
3d  ed.,  sec.  102 A. 

Recent  decisions  have  gone  further,  looking  more  to  the  situation 
of  the  parties  than  to  these  relations  alone. 

In  Lord  v.  Dall,  12  Mass.  115,  it  was  held  that  a  sister  had  an 
insurable  interest  in  the  life  of  a  brother,  who  stood  to  her  in  loco 
parentis.  The  court  said:  "In  common  understanding  no  one  would 
hesitate  to  say  that  in  the  life  of  such  a  brother  the  sister  had  an 
interest."  The  later  case  of  Loomis  v.  Eagle  Insurance  Co.,  6  Gray, 
396,  involved  the  question  of  the  interest  of  a  father  in  the  life  of  a 
minor  son,  but  SHAW,  C.  J.,  said  that  upon  broader  and  larger  grounds, 
independently  of  the  fact  that  the  son  was  a  minor  and  that  the 
assured  had  a  pecuniary  interest  in  his  earnings,  the  court  was  of 
opinion  that  the  father  had  an  insurable  interest.  These  broader 
grounds  appeared  further  on  to  be  "consideration  of  strong  morals 
and  the  force  of  natural  affection  between  near  kindred,  operating 
often  more  efficaciously  than  those  of  positive  law." 


DEVICES  FOR  SHIFTING  RISKS  45 

In  Aetna  Insurance  Co.  v.  France,  94  U.S.  561,  a  case  between 
brother  and  a  married  sister,  not  dependent,  BRADLEY,  J.  goes  so 
far  as  to  say:  "Any  person  has  a  right  to  procure  insurance  on  his 
own  life  and  assign  it  to  another,  provided  it  be  not  done  by  way  of 
cover  for  a  wager  policy;  and  where  the  relationship  between  the 
parties,  as  in  this  case,  is  such  as  to  constitute  a  good  and  valid 
consideration  in  law  for  any  gift  or  grant,  the  transaction  is  entirely 
free  from  such  imputation.  The  direction  of  payment  in  the  policy 
itself  is  equivalent  to  such  an  assignment." 

In  Elkhart  v.  Houghton,  103  Ind.  286,  the  insurable  interest  of  a 
grandson  in  the  life  of  a  grandfather,  with  whom  he  lived,  was  upheld. 
It  has  also  been  sustained  where  there  was  no  kinship,  as  in  the  case 
of  a  woman  who  was  engaged  to  be  married  to  a  man;  Chisholm  v. 
Nat.  Capitol  Insurance  Co.,  52  Mo.  213;  and  in  the  case  of  a  widow 
and  her  son-in-law,  who  lived  together;  Adams  v.  Reed,  38  S.W. 
Rep.  (Ky.)  420. 

The  principle  of  these,  and  other  like  cases,  is  that  the  interest 
does  not  depend  upon  any  liability  for  support  nor  upon  any  pecuniary 
consideration,  nor  even  upon  kinship.  It  may  be  for  the  benefit  of 
the  old  or  the  young,  where  the  relation  between  the  parties  is  such 
as  to  show  a  mutual  interest  and  to  rebut  the  presumption  of  a  mere 
wager.  The  contract  is  complete  and  legal  in  itself,  and  when  con- 
siderations of  public  policy  do  not  prohibit  its  enforcement  there  is  no 
reason  why  it  should  not  be  carried  out. 

The  declaration  in  this  case  shows  that  the  plaintiff's  claim  is 
not  objectionable  on  the  grounds  of  public  policy.  It  shows  that 
the  relation  of  the  plaintiff  and  her  niece  had  been  of  such  a  charac- 
ter that  each  had  reason  to  rely  upon  the  other  in  case  of  need. 
Should  the  younger  die  first,  the  help  and  care  which  might  have 
been  expected  from  her,  in  the  declining  years  of  the  aunt,  could  only 
be  supplied  by  insurance  upon  her  life.  This  is  no  more  speculation 
than  a  husband's  provision  for  his  wife  in  the  same  way.  It  is 
natural  and  reasonable,  and  in  accordance  with  modern  business 
methods.  In  short,  it  is  security  for  an  insurable  interest. 

We  therefore  think  that  the  contract  set  out  in  the  declaration  is 
valid,  since  it  falls  within  the  proper  line  of  distinction  between  valid 
contracts,  where  there  is  mutual  interest,  and  invalid  contracts  which 
are  evidently  .mere  speculation. 

The  demurrer  to  the  declaration  is  overruled. 


46  LAW  AND  BUSINESS 

QUESTIONS 

1.  What  test  did  the  court  announce  in  this  case  for  determining  whether 
one  person  has  an  insurable  interest  in  the  life  of  another  person  ? 

2.  Does  a  person  have  an  insurable  interest  in  his  own  life?    If  so,  what 
is  it? 

3.  P  insures  the  life  of  X,  his  cousin.    What  decision  in  an  action  on  the 
policy  after  the  death  of  X  ? 

4.  P  effects  insurance  on  the  life  of  W,  to  whom  he  is  under  a  contract  to 
marry.    W  dies  before  they  are  married.     P  sues  the  insurer  on  the 
policy.    What  decision  ? 

5.  P  takes  out  insurance  on  the  life  of  his  son,  now  twenty-one  years  of 
age  and  self-supporting.    What  decision  in  an  action  by  P  on  the  policy  ? 

6.  P,  an  infant,  lives  with  X  and  is  supported  by  her,  but  no  blood-relation 
exists  between  them.    Has  P  an  insurable  interest  in  the  life  of  X? 
Has  X  an  insurable  interest  in  the  life  of  P  ? 

7.  P  takes  out  insurance  on  the  life  of  X,  a  stranger  to  him.    WTien  X  dies, 
P  sues  the  insurer  on  the  policy.    What  decision? 

8.  In  the  foregoing  case,  after  the  insurance  policy  had  been  issued  and 
before  the  death  of  X,  P  had  legally  adopted  X  as  a  son.    What  decision 
in  an  action  by  P  on  the  policy  ? 

9.  In  general  what  is  the  amount  of  recovery  on  a  fire  insurance  policy  ? 
What  is  the  amount  of  recovery  on  a  life  insurance  policy  ? 

RITTLER  v.  SMITH 
70  Maryland  Reports  261  (1889) 

MILLER,  J.  In  June,  1886,  Victor  Smith  was  indebted  to  William 
H.  Rittler  in  the  sum  of  about  $1,000,  and  Smith  being  insolvent, 
Rittler  took  out  certificates  of  insurance  on  Smith's  life,  in  four  several 
mutual  aid  associations,  aggregating  on  their  face  the  sum  of  $6,500. 
These  certificates  were  all  in  favor  of  Rittler  and  he  paid  all  the 
premiums  or  assessments  thereunder.  Smith  died  in  March,  1887,  and 
Rittler  collected  from  these  insurances  the  sum  of  $2,124.82,  which 
appears  to  have  been  all  that  could  have  been  collected,  according 
to  the  terms  of  the  certificates,  and  the  financial  condition  of  the 
associations.  Deducting  from  this  sum  the  debt  and  interest  due 
Rittler,  the  premiums  he  had  paid,  and  the  costs  and  expenses 
of  effecting  the  insurances,  there  remained  a  balance  of  $474. 53,  as  of 
the  first  of  June,  1887.  On  the  third  of  October  following,  letters  of 
administration  on  Smith's  estate  were  granted  to  an  administratrix, 
who  thereupon  filed  her  bill  claiming  this  balance  as  belonging  to  the 
estate  of  the  decedent.  In  his  answer  Rittler  denied  this  claim,  and 


DEVICES  FOR  SHIFTING  RISKS  47 

insisted  that  the  money  belonged  to  him.  The  case  was  heard  on 
bill  and  answer,  and  the  court  below  decreed  in  favor  of  the  com- 
plainant. From  this  decree  Rittler  has  appealed. 

The  question  as  thus  presented  is  an  interesting  one,  is  of  first 
impression  in  this  state,  and  has  been  very  ably  argued.  On  the 
part  of  the  appellant  it  is  contended  that  where  a  creditor  with  his 
own  money  and  for  his  own  account,  effects  and  keeps  up  an  insurance 
on  the  life  of  his  debtor,  the  whole  of  the  proceeds  belong  to  him  unless 
it  appears  that  he  has  gone  into  it  for  the  mere  purpose  of  speculation, 
which  in  this  case  is  expressly  negatived  by  the  answer,  the  averments 
of  which  must  be  taken  as  true,  the  case  having  been  heard  on  bill 
and  answer.  On  the  other  hand,  counsel  for  the  appellee  contend, 
that  where  the  creditor  receives  more  than  enough  to  reimburse  him 
for  his  debt  and  outlay,  with  interest,  he  will,  as  to  the  balance  be 
regarded  as  a  trustee  for  the  personal  representative  of  the  debtor; 
that  the  law  says  to  the  creditor  in  such  a  case,  "you  may  protect 
yourself;  you  may  by  insuring  your  debtor's  life  secure  your  debt 
with  all  outlay  and  expenses;  you  may  make  yourself  whole,  but  you 
shall  not  speculate  on  his  death;  you  shall  not  have  a  greater  direct 
pecuniary  interest  in  his  death, than  you  may  have  in  his  life." 

There  have  been  numerous  decisions  upon  this  subject,  some  of 
which  are  conflicting.  On  many  points,  however,  bearing  upon  the 
question,  there  is  a  general  concurrence  of  judicial  opinion  and  author- 
ity. For  instance,  it  is  generally  held  by  the  courts  in  this  country 
that  one  who  has  no  insurable  interest  in  the  life  of  another  cannot 
insure  that  life.  Such  insurances  are  considered  gambling  contracts, 
and  for  that  reason  void  at  common  law  apart  from  any  statute 
forbidding  them. 

In  England  they  were  held  valid  at  common  law,  but  were  pro- 
hibited as  introducing  a  "  mischievous  kind  of  gaming,"  by  the  first 
section  of  Statute  14  Geo.  Ill,  chap.  48.  The  effect  of  this  section, 
as  construed  by  the  English  courts,  is  to  make  the  law  of  England, 
by  act  of  Parliament,  the  same  as  it  has  been  held  to  be  by  the  courts 
in  this  country  without  such  an  act.  In  some  American  cases  they 
have  been  denounced  as  void  not  simply  because  they  tend  to  promote 
gambling,  but  because  they  are  incentives  to  crime. 

The  force  of  this  latter  suggestion  has  been  and  may  well  be 
doubted.  It  means  that  one  not  related  or  connected  by  consan- 
guinity or  marriage,  who  may  have  a  direct  pecuniary  interest  in  the 
speedy  death  of  another,  will  thereby  be  tempted  to  murder  him, 


48  LAW  AND  BUSINESS 

though  he  knows  that  hanging  is  the  penalty  for  such  a  crime.  This 
doctrine  carried  to  its  logical  result  has  a  far-reaching  effect.  It 
strikes  down  every  legacy  to  a  stranger  which  may  become  known 
to  the  legatee,  as  is  frequently  the  case,  before  the  death  of  the 
testator.  It  makes  void  every  similar  limitation  in  remainder  after 
the  death  of  a  life  tenant.  Every  like  conveyance  of  property  in 
consideration  that  the  grantee  shall  support  the  grantor  during  his 
life,  falls  under  the  same  condemnation.  Yet  we  know  of  no  case 
in  which  a  court  has  declared  such  testamentary  dispositions  or 
conveyances  to  be  void  "on  this  ground.  Other  instances  in  which 
the  same  result  would  follow  from  the  application  of  this  doctrine, 
could  be  readily  suggested,  but  we  need  not  pursue  the  subject  further. 

All  the  authorities  also  concur  in  holding  that  a  creditor  has  an 
insurable  interest  in  the  life  of  his  debtor.  In  England,  it  was  at  one 
time  held  that  though  the  creditor  had  an  insurable  interest  at  the 
time  the  policy  was  issued,  yet  if  his  debt  was  paid  in  the  lifetime  of  his 
debtor,  and  his  interest  had  therefore  ceased,  he  could  not  recover, 
because  the  contract  of  life  insurance,  like  insurances  of  property, 
was  one  of  indemnity.  But  this  doctrine  has  long  since  been  repudi- 
ated, and  the  settled  rule  in  England. now  is,  that  a  life  insurance  in 
no  way  resembles  a  contract  of  indemnity,  but  is  an  agreement  to 
pay  a  certain  sum  of  money  upon  the  death  of  the  person  insured, 
in  consideration  of  the  due  payment  of  a  certain  fixed  annual  sum 
or  premium,  during  his  life,  and  hence  if  the  contract  be  valid  at  the 
time  it  was  entered  into,  notwithstanding  the  fact  that  the  interest 
of  the  creditor  has  ceased  during  the  life  of  his  debtor,  he  may  still 
recover  on  the  policy,  though  the  result  may  be  that  he  will  be  twice 
paid  for  his  debt,  once  by  his  debtor  and  again  by  recovery  on  the 
policy.  Dolby  v.  Life  insurance  Co,,  15  Com.  Bench,  365.  The 
same  construction  of  the  contract  has  been  approved  and  adopted 
by  this  court.  Emerick  v.  Coakley,  et  al.,  35  Md.  193;  Whitney  v. 
Independent  Mutual  Insurance  Co.,  15  Md.  326. 

In  support  of  the  view  taken  by  the  appellee's  counsel,  cases  have 
been  cited  in  which  it  has  been  held  that  the  assignee  of  a  life  policy, 
who  has  no  insurable  interest  in  the  life,  stands  in  the  same  position 
as  if  he  had  originally  taken  out  the  policy  for  his  own  benefit.  In 
other  words  the  contention  is  that  the  assured  himself  can  make  no 
valid  absolute  assignment  of  this  policy  to  one  who  has  no  insurable 
interest  in  his  life.  But  our  own  decisions  are  opposed  to  this.  It 


DEVICES  FOR  SHIFTING  RISKS  49 

is  settled  law  in  this  state  that  a  life  insurance  policy  is  but  a  chose 
in  action  for  the  payment  of  money,  and  may  be  assigned  as  such 
under  our  Act  of  1829,  chap.  51.  New  York  Life  Insurance  Co.  v. 
Flack,  3  Md.  341;  Whitridge  v.  Barry,  42  Md.  150.  It  is  quite~a 
common  thing  for  the  bond  or  promissory  note  of  a  private  individual 
to  be  sold  through  a  broker  to  a  bona  fide  purchaser,  for  less  than 
its  face  value;  and  when  the  latter  takes  an  assignment  of  it,  without 
recourse,  he  becomes  its  absolute  owner,  and  is  not  bound  to  refund 
to  the  vendor  anything  he  may  recover  upon  it  over  and  above  what 
he  paid  for  it.  So  a  life  policy  being  a  similar  chose  in  action  may  be 
disposed  of  and  assigned  in  the  same  way,  provided  the  assent  of  the 
insurer  is  obtained  where  it  is  so  stipulated  in  the  instrument. 

In  such  case  the  assignee  must  of  course  keep  the  policy  alive  by 
the  due  payment  of  premiums  if  he  wishes  to  realize  anything  from 
it.  Such  an  assignment  is  valid  in  this  state  if  it  be  a  bona  fide 
business  transaction,  and  not  a  mere  device  to  cover  a  gaming  contract. 
Such  is  also  the  English  rule.  Ashley  v.  Ashley,  3  Sim.  149.  These 
considerations  prevent  us  from  adopting  some  of  the  reasoning  of 
the  Supreme  Court  in  Warnock  v.  Dams,  104  U.S.  775.  It  seems  to  us, 
with  great  deference,  that  from  the  facts  in  that  case,  the  association, 
which  was  the  assignee,  could  well  be  regarded  as  standing  in  the 
same  position  as  if  it  had  taken  out  the  policy  in  its  own  name,  and 
having  no  insurable  interest  in  the  life,  it  clearly  became  a  wager 
policy.  The  assignment  was  made  the  day  after  the  policy  was 
issued  in  pursuance  of  an  agreement  to  that  effect  made  the  day  of  its 
issuance.  The  assignment  was  evidently  a  mere  device  to  cover  up  a 
gaming  transaction.  In  the  preceding  case  of  Cammack  v.  Lewis, 
15  Wallace,  643,  the  debt  due  the  creditor  was  only  $70  and  the 
policy  was  for  $3,000,  confessedly  without  consideration.  In  view 
of  these  facts  the  Court  well  said  "it  was  a  sheer  wagering  policy 
and  probably  a  fraud  on  the  insurance  company.  To  procure  a 
policy  for  $3,000  to  cover  a  debt  of  $70  is  of  itself  a  mere  wager. 
The  disproportion  between  the  real  interest  of  the  creditor  and  the 
amount  to  be  received  by  him,  deprives  it  of  all  pretence  to  be  a 
bona  fide  effort  to  secure  the  debt,  and  the  strength  of  this  proposition 
is  not  diminished  by  the  fact  that  Cammack  was  only  to  get  $2,000 
out  of  the  $3,000,  nor  is  it  weakened  by  the  fact  that  the  policy  was 
taken  out  in  the  name  of  Lewis  and  assigned  by  him  to  Cammack." 
It  was  "  under  these  circumstances  "  that  the  court  held  that  Cammack 


50  LAW  AND  BUSINESS 

could  hold  the  policy  only  as  security  for  the  debt  due  him  when  it 
was  assigned,  and  such  advances  as  he  might  afterward  make  on 
account  of  it. 

If  such  then  be  the  nature  of  a  life  insurance  contract,  and  if  a 
bona  fide  assignee  for  value,  though  a  stranger,  may  recover  and  hold 
the  whole  amount  for  his  own  use,  why  may  not  a  creditor  who  in 
pursuance  of  a  bona  fide  effort  to  secure  payment  of  his  debt,  insures 
the  life  of  his  debtor  and  takes  the  policy  in  his  own  name  or  for  his 
own  benefit,  be  entitled  to  hold  all  he  can  recover?  He  is  in  fact 
the  owner  of  the  policy,  takes  the  risk  of  the  continued  solvency  of 
the  insurance  company,  and  is  obliged  to  keep  the  policy  alive  by 
paying  the  annual  premiums  during  the  life  of  the  debtor,  and  the 
latter  is  under  no  obligation  to  do  anything,  and  in  fact  does  nothing 
in  this  respect.  If  he  pays  the  debt  to  his  creditor  he  has  only  dis- 
charged his  duty,  and  what  interest  has  he  in  the  policy,  or  in  what  his 
creditor  may  recover  upon  it  ?  In  a  recent  English  case  it  was  held 
that  a  creditor  who  had  insured  the  life  of  his  debtor  could  retain  all 
the  sums  he  had  received  from  the  policies,  without  accounting  for 
them  to  the  representatives  of  the  debtor,  unless  there  was  a  distinct 
evidence  of  a  contract,  to  the  effect  that  the  creditor  had  agreed  to 
effect  the  policy,  and  that  the  debtor  had  agreed  to  pay  the  premiums, 
in  which  case  only,  will  the  policy  be  held  in  trust  for  the  debtor. 
Bruce  v.  Garden,  Law  Rep.,  5  Chancery  Appeals,  32.  This  is  the 
latest  English  authority  to  which  we  have  been  referred,  and  was 
decided  by  Lord  Chancellor  Hatherley  on  appeal.  In  that  case  the 
amount  received  from  the  policies  by  the  creditor  was  nearly  twice 
as  much  as  the  debt  due  him  by  his  debtor. 

We  agree  that  there  may  be  such  a  gross  disproportion  between 
the  debt  and  the  amount  of  the  policy,  as  to  stamp  the  transaction 
as  indicating  upon  its  face  want  of  good  faith,  and  as  a  mere  specula- 
tion or  wager.  The  case  of  Cammack  v.  Lewis  affords  an  instance  of 
such  gross  disparity,  but  no  general  rule  on  this  subject  has  as  yet 
been  laid  down  by  the  courts,  and  it  is  probably  better  to  leave  each 
case  to  depend  on  its  own  circumstances.  The  disparity  between 
the  debt  of  $1,000  and  $6,500,  the  aggregate  of  the  sums  named  in  the 
certificates,  is  certainly  great,  but  upon  examination  it  is  more 
apparent  than  real.  The  answer,  which  we  must  take  as  true,  shows 
bona  fides  on  the  part  of  the  creditor.  The  policies  were  all  in  mutual 
aid  associations  where  mortuary  dues  are  paid  by  assessments  and 
where  of  course  the  sum  to  be  realized  depends  upon  the  number  and 


DEVICES  FOR  SHIFTING  RISKS  51 

solvency  of  the  members:  One  of  the  certificates  for  $2,000  contained 
a  condition  that  only  one-half  should  be  paid  if  the  assured  should  die 
within  one  year  from  its  date,  an  event  which  actually  occurred. 
Another  expressly  provided  that  he  should  receive  an  amount  not 
exceeding  $2,000,  but  according  to  the  members  liable  to  assessment 
on  this  certificate,  and  from  that  he  received  according  to  its  terms 
only  $250.  Another  of  the  associations  was  in  financial  difficulties 
and  he  compromised  his  claim  on  a  certificate  for  $1,000,  and  received 
only  $132.82.  By  taking  out  these  certificates  he  became  liable  to 
be  assessed  as  a  member,  and  during  the  short  time  they  were  running 
(from  June  to  the  following  March)  he  paid  in  this  shape  and  in 
premiums  the  sum  of  $351.75.  In  view  of  the  character  of  these 
certificates  and  of  the  associations  by  which  they  were  issued,  we 
cannot  say  the  disproportion  between  the  debt  and  the  real  amount 
and  value  of  the  insurances  is  so  great  in  this  case  as  to  warrant  a 
sentence  of  condemnation  against  the  transaction  as  being  a  mere 
speculation  or  wager  on  the  life  of  the  debtor. 

We  shall  therefore  reverse  the  decree  appealed  from  and  dismiss 
the  appellee's  bill. 

QUESTIONS 

1.  X  borrows  $1,000  from  P,  to  be  repaid  in  two  years.    P  insures  the 
life  of  X  in  the  sum  of  $1,500  to  secure  the  debt.    At  the  end  of  the 
year,  X  pays  the  debt  to  P.    P,  however,  continues  to  pay  the  premiums 
on  X's  life  until  his  death,  three  years  later.    P  is  suing  the  insurer  on 
the  policy.    What  decision  ? 

2.  P  insures  the  life  of  X  for  $1,000.    Two  years  later,  X  borrows  $1,000 
from  P.    X  die's  without  having  paid  the  debt.    P  is  suing  the  com- 
pany on  the  policy.    What  decision  ? 

3.  P  made  a  nominal  loan  of  $500  to  X  so  that  he  could  insure  X's  life, 
which  he  immediately  did  in  the  sum  of  $3,000.    X  lived  forty  years, 
during  which  time  P  paid  premiums,  amounting  to  about  $2,500.    This 
is  an  action  by  P  on  the  policy.    What  decision  ? 

4.  X  borrows  $5,000  from  P  which  he  agreed  to  repay  in  five  years.     P 
immediately  insures  X's  life  for  $15,000.    A  year  later,  X  died  without 
having  repaid  any  of  the  money  advanced  to  him  by  P.    P  sues  on 
the  policy.    What  decision  ? 

5.  Suppose  that  P  recovers  the  full  amount  of  the  policy  in  the  foregoing 
case,  is  he  under  any  obligation  to  account  to  the  personal  representa- 
tive of  X  for  any  part  of  the  proceeds  of  the  policy  ? 

6.  Some  courts  hold  that  a  creditor  may  insure  the  life  of  the  debtor  in 
an  amount  equal  to  the  sum  of  the  debt,  all  premiums  payable  during 


52  LAW  AND  BUSINESS 

the  debtor's  life  expectancy,  and  interest  on  the  premiums  and  debt 
for  that  period.     Does  this  rule  seem  sound  ? 

7.  A,  B,  and  C  are  partners,  engaged  in  the  hardware  business.    Each 
takes  out  insurance  on  the  lives  of  the  others.    Are  these  policies 
valid? 

8.  D  owes  C  $1,500.     G  is  guarantor  of  the  debt.    Has  G  an  insurable 
interest  in  the  life  of  D  ?    If  so,  in  what  amount  may  he  insure  D's  life  ? 

9.  P,  a  stockholder  in  the  X  Company,  insures  the  life  of  X,  the  president 
of  the  company.    X  dies.    P  brings  an  action  against  the  insurer  on 
the  policy.    What  decision  ? 

c)  Concealment,  Misrepresentation,  and  Fraud 

PENNSYLVANIA  MUTUAL  LIFE  INSURANCE  COMPANY  v. 

MECHANICS  SAVINGS  BANK  &  TRUST  COMPANY 

72  Federal  Reporter  413  (1896) 

TAFT,  CIR.  J.  Coming  now  to  the  American  authorities,  we  find 
very  early  in  reported  cases  a  disposition  to  depart  from  the  strict 
rules  of  marine  insurance  law  in  the  consideration  of  fire  and  life  poli- 
cies. In  Loan  Co.  v.  Snyder,  16  Wend.  481,  Chancellor  WALWORTH 
delivering  the  opinion  of  the  Supreme  Court  of  Errors  of  New  York, 
refers  to  the  peculiar  rule  of  construction  applied  to  that  "anomalous 
and  informal  instrument  called  a  'marine  policy,'"  and  expresses 
the  opinion  that  it  is  not  to  be  applied  in  its  strictness  to  fire  policies. 
The  same  view  is  expressed  in  Jolly's  Adm'rs  v.  Baltimore  Equitable 
Society,  i  Har.  &  G.  295,  by  the  Court  of  Appeals  of  Maryland.  In 
Burritt  v.  Insurance  Co.,  5  Hill,  188,  BRONSON,  J.,  speaking  for  the 
Supreme  Court  of  New  York,  after  referring  to  the  rule  by  which 
nondisclosure  of  material  facts  avoids  a  marine  policy,  although  no 
inquiry  be  made,  and  although  it  is  the  result  of  innocent  mistake 
or  inadvertence  said:  "But  this  doctrine  cannot  be  applicable — at 
least,  not  in  its  full  extent — to  policies  against  fire.  If  a  man  is 
content  to  insure  my  house  without  taking  the  trouble  to  inquire  of 
what  materials  it  is  constructed,  how  it  is  situated  in  reference  to  other 
buildings,  or  to  what  uses  it  is  applied,  he  has  no  ground  for  complaint 
that  the  hazard  proves  to  be  greater  than  he  had  anticipated,  unless 
I  am  chargeable  with  some  misrepresentation  concerning  the  nature 
or  extent  of  the  risk.  It  is  therefore  the  practice  of  companies  which 
insure  against  fire  to  make  inquiries  of  the  assured,  in  some  form, 
concerning  all  such  matters  as  are  deemed  material  to  the  risk,  or 
which  may  affect  the  amount  of  the  premium  to  be  paid.  This  is 


DEVICES  FOR  SHIFTING  RISKS  53 

sometimes  done  by  the  conditions  of  insurance  annexed  to  the  policy, 
and  sometimes  by  requiring  the  applicant  to  state  particular  facts 
in  a  written  application  for  insurance.  When  thus  called  upon  to 
speak,  he  is  bound  to  make  a  true  and  full  representation  concernii^g 
all  the  matters  brought  to  his  notice,  and  any  concealment  will  have 
the  like  effect  as  in  the  case  of  a  marine  risk." 

The  use  of  "  concealment,"  in  this  last  passage,  should  be  remarked. 
It  means  there  a  failure  fully  to  answer  a  question  put.  It  is  not  a 
mere  silence  upon  a  matter  not  made  the  subject  of  inquiry.  It  is 
necessary  to  determine  in  which  sense  the  word  is  used  in  decided 
cases,  before  their  bearing  on  the  present  question  can  be  clearly 
understood.  Here  we  are  considering  only  the  duty  of  the  insured  in 
respect  to  something  not  inquired  about.  The  Supreme  Court  of 
the  United  States  in  Clark  v.  Insurance  Company,  8  How.  235,  249, 
suggests  a  distinction  between  fire  and  marine  insurance,  in  reference 
to  the  obligation  of  the  insured  to  speak  when  not  inquired  of,  and 
cites  in  support  of  the  Maryland  and  New  York  cases,  just  referred  to. 
In  Gates  v.  Insurance  Company,  5  N.Y.  469,  the  Court  of  Appeals 
held  that  in  case  of  a  fire  policy,  where  the  insured  makes  a  full  answer 
to  all  the  questions  put  to  him,  he  is  not  answerable  for  an  omission 
to  mention  the  existence  of  other  facts,  about  which  no  inquiry  is 
made  unless  he  withholds  mention  of  them  with  intent  to  defraud. 
"He  has  a  right  to  suppose  that  the  insurer,  in  making  inquiries  in 
respect  to  particular  facts,  deems  all  other  to  be  immaterial  to  the 
risk  to  be  taken,  or  that  he  takes  upon  himself  the  knowledge  or 
waives  information  of  them."  See,  also,  Browning  v.  Insurance  Co., 
71  N.Y.  508;  Woodruff  v.  Insurance  Co.,  83  N.Y.  133;  Short  v. 
Insurance  Co.,  90  N.Y.  16;  Haight  v.  Insurance  Co.,  92  N.Y.  55. 
In  Insurance  Co.  v.  Harmer,  2  O.  St.  452,  which  was  a  fire  insurance 
case,  the  defense  was  made  that,  previous  to  the  issuing  of  the  policy, 
there  had  been  a  fire  in  the  insured  premises,  which  had  not  been 
disclosed  to  the  insurer.  The  court  charged  the  jury  that,  if  they 
found  the  circumstances  material  to  the  risk,  the  policy  was  void, 
''whether  concealment  resulted  from  fraud,  accident  or  mistake." 
Judge  RANNEY — one  of  Ohio's  greatest  judges — presided  at  the  circuit 
in  this  cause,  and  delivered  the  opinion  of  the  Supreme  Court.  In 
the  Supreme  Court  he  expressed  the  view  that  he  was  in  error  in  his 
charge,  in  thus  enforcing  the  rule  of  marine  insurance  in  a  fire  insurance 
case.  Such  an  expression  of  opinion  is  not  necessary  to  a  conclusion 
in  the  case,  but  the  high  standing  of  the  judge  gives  great  weight 


54  LAW  AND  BUSINESS 

to  even  his  obiter  dictum.  He  said :  "  It  is  not  now  true,  whatever  may 
be  thought  of  the  older  authorities,  that  there  is  no  difference  in  this 
respect  (i.e.,  as  to  the  rule  of  concealment)  between  marine  and  fire 
insurance,  nor  that  a  failure  to  disclose  every  fact  material  to  the  risk, 
upon  which  information  is  not  asked  for,  or  suppressed  with  a  fraudu- 
lent intent,  will  avoid  a  policy  of  the  latter  description.  The  reason 
of  the  rule,  and  the  policy  in  which  it  was  founded,  in  its  application 
to  marine  risk,  entirely  fail  when  applied  to  fire  policies.  In  the 
former  the  subject  of  insurance  is  generally  beyond  the  reach,  and 
not  open  to  the  inspection,  of  the  underwriter,  often  in  distant  ports 
or  upon  the  high  seas,  and  the  peculiar  perils  to  which  it  may  be 
exposed,  too  numerous  to  be  anticipated  or  inquired  about,  known 
only  to  the  owners  and  those  in  their  employ;  while  in  the  latter  it  is, 
or  may  be,  seen  and  inspected  before  the  risk  is  assumed,  and  its 
construction,  situation,  and  ordinary  hazards  as  well  appreciated  by 
the  underwriter  as  the  owner.  In  marine  insurance  the  underwriter, 
from  the  very  necessities  of  his  undertaking,  is  obliged  to  rely  upon 
the  assured,  and  has  therefore  the  right  to  exact  a  full  disclosure  of  all 
the  facts  known  to  him  which  may  in  any  way  affect  the  risk  to  be 
assumed.  But  in  fire  insurance  no  such  necessity  for  reliance  exists, 
and  if  the  underwriter  assumes  the  risk  without  taking  the  trouble 
to  either  examine  or  inquire,  he  cannot  very  well,  in  the  absence  of  all 
fraud,  complain  that  it  turns  out  to  be  greater  than  he  anticipated. 
And  so  are  the  latest  and  best  authorities." 

In  Massachusetts,  in  the  earlier  authorities,  the  stringent  rule  of 
marine  insurance  as  to  concealments  was  declared  applicable  with  all 
its  rigor  to  fire  policies.  In  Curry  v.  Insurance  Co.,  10  Pick.  535, 
it  was  held  that  if  the  assured  did  not  communicate  facts  within  his 
knowledge  which  increased  the  risk,  though  he  was  not  questioned 
concerning  them  and  though  he  supposed  the  facts  not  to  be  material, 
the  policy  was  void.  This  can  hardly  be  reconciled  with  the  later 
cases  in  the  same  court.  In  Washington  Mills  Emery  Manufacturing 
Co.  v.  Weymouth  B.  Mutual  Insurance  Co.,  135  Mass.  503,  the  question 
was  whether  the  failure  to  state  that  the  insured  did  not  own  the  land 
on  which  the  building  stood  avoided  the  policy.  No  fraud  appeared. 
The  court  said:  "The  defendant  saw  fit  to  issue  this  policy  without 
any  specific  inquiries  of  the  plaintiff  as  to  the  title  of  the  land, 
and  without  any  representation  by  the  plaintiff  on  this  point.  It 
was  its  own  carelessness,  and  it  cannot  avoid  the  policy  without 
proving  intentional  misrepresentation  or  concealment  on  the  part  of 


DEVICES  FOR  SHIFTING  RISKS  55 

the  plaintiff.  An  innocent  failure  to  communicate  facts  about  which 
the  plaintiff  was  not  asked  will  not  have  this  effect":  citing  Com.  v. 
Hide  and  Leather  Insurance  Co.,  112  Mass.  136;  Fowle  v.  Insurance 
Co.,  122  Mass.  191;  Walsh  v.  Association,  127  Mass.  383. 

Nor  does  Chief  Justice  SHAW'S  definition  of  "concealment"  in  a 
fire  insurance  case  seem  to  be  as  broad  as  that  prevailing  in  marine 
insurance.  In  Daniels  v.  Insurance  Co.,  12  Cush.  416,  he  said,  in 
defining  the  term  as  used  in  a  fire  policy:  '" Concealment '  is  the 
designed  and  intentional  withholding  of  any  fact  material  to  the  risk, 
which  the  assured,  in  honesty  and  good  faith,  ought  to  communicate 
to  the  underwriter.  Mere  silence  on  the  part  of  the  assured,  especi- 
ally as  to  some  matter  of  fact  which  he  does  not  consider  it  important 
for  the  underwriter  to  know,  is  not  to  be  considered  as  such 
concealment." 

The  number  of  life  insurance  cases  in  which  the  question  has  arisen 
is  small.  In  Rawls  v.  Insurance  Co.,  27  N.Y.  287,  the  Court  of  Appeals 
held  that,  where  an  applicant  for  life  insurance  fully  and  truly 
answered  all  questions  put  to  him  by  the  company,  the  mere  omission 
to  state  matter,  though  material  to  the  risk,  would  not  be  a  conceal- 
ment, and  would  not  affect  the  validity  of  the  policy,  because  the 
applicant  might  presume  that  the  insurer  had  questioned  him  on  all 
subjects  which  he  deemed  material.  In  Mallory  v.  Insurance  Co., 
47  N.Y.  52,  57,  the  same  court  sustained  a  charge  to  the  jury,  that, 
if  the  applicant  did  not  conceal  any  facts,  which,  in  his  own  mind, 
were  material  in  making  the  application,  the  policy  was  not  void. 
See,  also,  Cheever  v.  Insurance  Co.,  4  Am.  Law  Rev.  155.  In  Vose  v. 
Insurance  Co.,  6  Cush.  42,  the  supreme  judicial  court  of  Massachusetts 
announced  the  principle,  as  applicable  to  life  policies,  that  the  con- 
cealment of  a  material  fact  will  avoid  the  policy,  though  it  is  the 
result  of  accident  or  negligence,  and  not  of  design.  The  case  did 
not  call  for  the  application  of  such  a  principle.  The  applicant  was 
asked  if  he  was  afflicted  with  any  disease.  He  answered  that  he  was 
not.  At  the  time  he  had  consumption,  and  had  experienced  several 
of  the  premonitory  symptoms.  His  answers  were  made  the  basis  of 
the  policy.  It  is  probable  that  the  term  "concealment,"  as  used  in 
this  case,  refers  to  an  incomplete  answer  to  a  general  question,  rather 
than  a  failure  to  volunteer  a  fact  not  asked  for,  because  the  court  uses 
in  the  opinion  language  which, is  incorporated  in  the  headnote  as 
follows:  "It  is  the  duty  of  the  insured  to  disclose  all  material  facts 
within  his  knowledge.  Although  specific  questions,  applicable  to  all 


56  LAW  AND  BUSINESS 

men,  are  proposed  by  the  insurers,  yet  there  may  be  particular 
circumstances  affecting  the  individual  to  be  insured,  which  are  not 
likely  to  be  known  to  the  insurers;  and  the  concealment  of  a  material 
fact,  when  a  general  question  is  put  by  the  insurers,  at  the  time  of 
effecting  the  policy,  which  would  elicit  that  fact,  will  vitiate  the 
policy." 

But  whatever  the  effect  of  this  case,  we  think  the  modern  tendency, 
even  in  Massachusetts  decisions,  is  to  require  that  a  non-disclosure  of 
a  fact  not  inquired  about  shall  be  fraudulent,  before  vitiating  the 
policy;  and,  as  already  stated,  this  view  is  founded  on  the  better  reason. 
The  subject  is  by  no  means  as  clear,  upon  the  authorities,  as  could 
be  wished,  and  the  text-writers  find  much  difficulty  in  reconciling 
the  cases.  May,  Insurance  (3d.  ed.)  sees.  202,  203,  207. 

QUESTIONS 

1.  What  rules  does  Justice  TAFT  announce  in  this  case  concerning  the 
effect  of  concealment  of  material  facts  in  the  formation  of  contracts  of 
insurance  ? 

2.  P  applies  for  insurance  on  his  house.    In  the  application  appear  these 
questions,  among  others:    "Is  the  property  incumbered?    If  so,  in 
what  amount."    P  answers:    "One  mortgage."    As  a  matter  of  fact, 
there  were  two  mortgages  on  the  house   and  land   in   question.    P 
sues  D,  the  insurer,  for  a  loss  under  the  policy.    D  asserts  the  right 
to  avoid  the  contract.    What  decision? 

3.  In  the  foregoing  case,  P  makes  this  answer  to  the  question:    "It  is 
incumbered."    In  an  action  on  the  policy  for  a  loss,  D  claims  the 
right  to  avoid  the  policy  on  the  ground  of  concealment  by  P.    What 
decision  ? 

4.  P  applies  for  insurance  on  his  house.    The  insurer  asks  no  questions 
whatsoever  of  P.    P  sues  D  on  the  policy  for  a  loss.    D  contends  that 
the  policy  is  avoided  because  P  failed  to  disclose  the  fact  that  the 
house  was  vacant  at  the  time  the  application  for  insurance  was  made . 
What  decision  ? 

5.  Someone  had  attempted  to  set  fire  to  P's  house;  alarmed  by  this  fact, 
he  went  immediately  to  D  and  applied  for  insurance  on  the  house;  he 
answered  truthfully  all  questions  put  to  him  by  D  with  respect  to  the 
risk  but  did  not  volunteer   the  information  about   the  attempt  on 
the  part  of  someone  to  set  fire  to  the  house.    In  an  action  by  P  on 
the  policy,  the  company  contends  that  the  policy  is  void  because  of  the 
concealment  of  this  material  fact  by  P.     What  decision  ? 

6.  X,  just  before  going  to  a  hospital  for  a  dangerous  operation,  effected 
insurance  on  his  life  without  disclosing  to  the  company  the  proposed 


DEVICES  FOR  SHIFTING  RISKS  57 

operation.    X  dies  from  the  effects  of  the  operation.    What  decision 
in  an  action  by  P's  personal  representative  on  the  policy? 

7.  X,  cashier  of  a  bank,  misappropriated  $25,000  of  the  bank's  money. 
Realizing  that  he  would  never  be  able  to  repay  the  money,  X  insured  his 
life  in  a  large  amount  for  the  benefit  of  his  wife  and  children.    After  his 
suicide,  his  wife  brings  an  action  on  the  policy.    What  decision  ? 

8.  In  question  2,  P  contends  that  the  information  asked  for  was  not 
material  to  the  risk.    Is  this  contention  well  founded  ? 

9.  P  applies  for  insurance  on  his  life.    He  answers  truthfully  all  questions 
asked  him  but  fraudulently  conceals  the  fact  that  his  physician  had 
recently  informed  him  that  he  had  organic  heart  trouble.    As  a  matter 
of  fact  the  doctor  was  mistaken  in  his  diagnosis.    A  year  later,  P  was 
killed  in  an  automobile  accident.    What  decision  in  an  action  by  P's 
personal  representative  on  the  policy? 

PROUDFOOT  v.  MONTEFIORE 
Law  Reports  2  Queen's  Bench  Cases  511  (1867) 

COCKBURN,  C.  J.  This  was  an  action  against  the  defendant,  as 
chairman  of  the  Alliance  Marine  Insurance  Company,  for  the  recovery 
of  damages  from  the  company  in"  respect  of  the  company  not  having 
delivered  to  the  plaintiff  a  policy  of  insurance  on  certain  goods  shipped 
on  board  a  vessel  called  the  "Anne  Duncan,"  pursuant  to  an  agreement 
alleged  by  the  plaintiff  to  have  been  entered  into  between  him  and  the 
company,  and  in  respect  of  the  company  not  having  paid  the  sum  of 
money  which  the  plaintiff  alleges  would  have  become  due  on  such 
policy  if  the  same  had  been  so  delivered. 

The  agreement  was  for  insurance  on  a  cargo  of  madder,  lost  or 
not  lost,  shipped  at  Smyrna,  on  a  voyage  from  Smyrna  to  Liverpool, 
on  board  the  ship,  "Anne  Duncan,"  for  and  on  account  of  the  plaintiff, 
and  consigned  to  him  by  one  T.  B.  Rees,  of  Smyrna. 

The  plaintiff,  a  merchant  at  Manchester  and  Liverpool,  dealt 
largely  in  madders  in  the  Smyrna  market,  and  Rees,  being  resident  at 
Smyrna,  was  employed  by  him  at  a  salary  of  £800  a  year  to  make 
purchases  of  madder  on  his  account,  and  to  ship  and  consign  the 
cargoes  to  him.  The  cargo  in  question  was  purchased  and  shipped  by 
Rees  in  the  course  of  his  employment  as  such  agent.  The  ship,  with 
the  cargo  on  board,  sailed  from  Smyrna  on  the  twenty-first  of  January, 
1 86 1,  but  again  brought  up  in  the  Gulf  of  Smyrna  on  the  same  day. 
She  set  sail  again  on  the  twenty-third,  but  was  stranded  in  the  course 
of  that  day,  and  became  a  wreck.  The  cargo  became  a  total  loss. 
Intelligence  of  the  stranding  of  the  ship  was  communicated  to  Rees 


58  LAW  AND  BUSINESS 

on  the  morning  of  the  twenty-fourth.  On  the  twenty-sixth,  which 
was  the  first  post  day,  he  communicated  by  letter  to  the  plaintiff 
the  loss  of  the  vessel;  and  the  fact  that  though  the  cargo  had  been  got 
out,  yet  as  the  vessel  had  had  1 2  feet  of  water  in  the  hold,  the  greater 
part  of  the  cargo  would  be  seriously  damaged.  Having  communicated 
this  information,  the  letter  proceeds  thus:  "I  hope  to  goodness  you 
are  fully  insured.  On  the  twelfth  instant  I  forwarded  you  invoice 
and  weights  of  the  shipment  by  her,  which  gave  you  plenty  of  time 
to  effect  insurance.  Lloyd's  agents  have  telegraphed  the  disaster, 
which  will  reach  London  before  my  letter  of  the  nineteenth  instant, 
inclosing  bill  of  lading.1  I  did  not  dare  telegraph  to  you,  for  when 
once  you  had  the  intelligence  in  hand  you  were  prevented  from  insur- 
ing." On  the  thirty-first  of  January  the  plaintiff,  after  receipt  of  the 
letters  from  Rees  of  the  twelfth  and  nineteenth  of  January,  but  prior 
to  the  receipt  of  that  of  the  twenty-sixth,  gave  instructions  to  effect 
the  policy,  and  the  slip  was  signed  on  the  same  day  by  the  company's 
agent  at  Manchester. 

There  was,  therefore,  no 'fraud  or  undue  concealment  by  the 
plaintiff  of  a  material  fact  within  his  personal  knowledge.  On  the 
other  hand,  it  is  clear  that  the  fact  of  the  loss  of  the  vessel  and  damage 
to  the  cargo  might  have  been  communicated  to  him  by  Rees  by  means 
of  the  telegraph,  but  was  purposely  kept  back  by  the  agent  for  the 
fraudulent  purpose  of  enabling  the  plaintiff  to  insure.  We  think  it 
clear,  looking  to  the  position  of  Rees  as  agent  to  purchase  and  ship 
the  cargo  for  the  plaintiff,  that  it  was  his  duty  to  communicate  to  his 
principal  the  disaster  which  had  happened  to  the  cargo;  and,  looking 
to  the  now  general  use  of  the  electric  telegraph,  in  matters  of  mercan- 
tile interest,  between  agents  and  their  employers,  we  think  it  was  the 
duty  of  the  agent  to  communicate  with  his  employers  by  this  speedier 
means  of  communication. 

From  the  letter  of  the  agent  it  appears  that,  but  for  the  fraudulent 
motive  for  his  silence,  he  would,  in  the  ordinary  course  of  his  duty 
have  conveyed  the  intelligence  of  the  loss  to  his  employer,  and  would 
have  availed  himself  of  the  telegraph  for  that  purpose. 

Upon  the  above  facts,  the  question  arises  whether  the  plaintiff, 
the  assured,  is  so  far  affected  by  the  knowledge  of  his  agent  of  the  loss 
of  the  vessel  and  damage  to  the  cargo  as  that  the  fraud  thus  com- 

TThe  telegram  was  received,  and  the  loss  published  in  Lloyd's  list  of  the 
twenty-ninth  of  January;  but  neither  the  plaintiff  nor  the  company's  agent  was 
aware  of  it. 


DEVICES  FOR  SHIFTING  RISKS  59 

mitted  on  the  underwriter,  through  the  intentional  concealment  of 
the  agent,  though  innocently  committed  so  far  as  the  plaintiff  is 
concerned,  will  afford  a  defence  to  the  underwriter  on  a  claim  to  enforce 
the  policy. 

Notwithstanding  the  dissent  of  so  eminent  a  jurist  as  Mr.  Justice 
STORY,  we  are  of  opinion  that  the  cases  of  Fitzherbert  v.  Mather 
(i  T.R.  12)  and  Gladstone  v.  King  (i  M.  and  S.  35)  were  well  decided; 
and  that  if  an  agent  whose  duty  it  is,  in  the  ordinary  course  of  business, 
to  communicate  information  to  his  principal  as  to  the  state  of  a  ship 
and  cargo,  omits  to  discharge  such  duty,  and  the  owner,  in  the 
absence  of  information  as  to  any  fact  material  to  be  communicated 
to  the  underwriter,  effects  an  insurance,  such  insurance  will  be  void, 
on  the  ground  of  concealment  or  misrepresentation.  The  insurer  is 
entitled  to  assume,  as  the  basis  of  the  contract  between  him  and  the 
assured,  that  the  latter  will  communicate  to  him  every  material  fact 
of  which  the  assured  has,  or,  in  the  ordinary  course  of  business,  ought 
to  have  knowledge;  and  that  the  latter  will  take  the  necessary 
measures,  by  the  employment  of  competent  and  honest  agents,  to 
obtain,  through  the  ordinary  channels  of  intelligence  in  use  in  the 
mercantile  world,  all  due  information  as  to  the  subject-matter  of 
the  insurance.  This  condition  is  not  complied  with  where,  by  the 
fraud  or  negligence  of  the  agent,  the  party  proposing  the  insurance 
is  kept  in  ignorance  of  a  material  fact,  which  ought  to  have  been  made 
known  to  the  underwriter,  and  through  such  ignorance  fails  to  dis- 
close it. 

It  has  been  said,  indeed,  that  a  party  desiring  to  insure  is  entitled, 
on  paying  a  corresponding  premium,  to  insure  on  the  terms  of  receiving 
compensation  in  the  event  of  the  subject-matter  of  the  insurance 
being  lost  at  the  time  of  the  insurance,  and  that  he  ought  not  to  be 
deprived  of  the  advantage,  which  he  has  paid  to  secure,  by  the 
misconduct  of  his  agent.  But  to  this  there  are  two  answers:  first, 
that  as  we  have  already  pointed  out,  the  implied  condition  on  which 
the  underwriter  undertakes  to  insure-^-not  only  that  every  material 
fact  which  is,  but  also  that  every  fact  which  ought  to  be,  in  the  knowl- 
edge of  the  assured  shall  be  made  known  to  him — is  not  fulfilled; 
secondly,  as  was  said  by  the  court  in  Fitzherbert  v.  Mather  (i  T.R.  12, 
1 6),  where  a  loss  must  fall  on  one  of  two  innocent  parties  through  the 
fraud  or  negligence  of  a  third,  it  ought  to  be  borne  by  the  party  by 
whom  the  person  guilty  of  the  fraud  or  negligence  has  been  trusted 
or  employed. 


60  LAW  AND  BUSINESS 

By  thus  holding,  we  shall  prevent  the  tendency  to  fraudulent 
concealment  on  the  part  of  masters  of  vessels  and  agents  at  a  distance, 
in  matters  on  which  they  ought  to  communicate  information  to  their 
principles,  as  also  any  tendency  on  the  part  of  principals  to  encourage 
their  servants  and  agents  so  to  act.  For  these  reasons  our  judgment 
must  be  for  the  defendant. 

QUESTIONS 

1.  Did  the  agent  in  this  case  have  any  authority  to  withhold  from  his 
principal  information  concerning   the  loss  of   the  ship?     If  not,  why 
should  the  plaintiff  be  charged  with  the  consequences  of  his  fraudulent 
concealment  ? 

2.  Suppose  that  the  agent  had  sent  a  telegram  to  his  principal  concerning 
the  loss  of  the  ship,  but  that  the  insurance  had  been  effected  before 
the  telegram  had  reached  the  principal,  what  would  have  been  the  court's 
decision  ? 

3.  P  applies  for  insurance  on  his  house.    The  company  sends  an  agent,  A, 
to  examine  the  premises.    A  discovers  a  defective  chimney  in  the  build- 
ing but  does  not  report  it  to  the  company,  for  fear  that  the  company 
will  reject  the  risk.    In  an  action  on  the  policy,  the  company  contends 
that  the  policy  is  void  because  of  the  fraudulent  concealment  of  a  material 
fact  by  A.    What  decision  ? 

4.  The  D  Company  entered  into  a  contract  with  W  to  insure  the  life  of  her 
husband,  H.    When  the  policy  was  delivered  two  days  later,  W  did  not 
disclose  the  fact  that  her  husband  had  sustained  a  serious  injury  on  the 
day  before.    H  died  from  the  effects  of  the  injury.    W  sues  on  the 
policy.    What  decision  ? 

DENNISON  v.  THOMASTON  MUTUAL  INSURANCE 
COMPANY 

20  Maine  Reports  125  (1841) 

This  was  an  action  upon  a  policy  of  insurance  against  fire  upon 
the  plaintiff's  dwelling  house  and  store,  in  Washington  block,  in 
the  city  of  Bangor,  bearing  date,  January  5,  1837. 

On  the  trial  of  the  case,  before  SHEPLEY,  J.,  the  plaintiff  introduced 
the  policy  of  insurance,  which  was  in  the  usual  form.  Among  the 
conditions  of  insurance  referred  to,  and  made  a  part  of  the  policy,  was 
this:  "No  insurance  will  entitle  the  insured  to  any  indemnity  for 
loss  or  damage,  if  the  description  by  the  applicant  of  the  building 
or  property  insured  be  materially  false  or  fraudulent;  or  if  any  cir- 
cumstance material  to  the  risk  be  suppressed,"  etc. 


DEVICES  FOR  SHIFTING  RISKS  6 1 

In  the  application  for  insurance,  in  reply  to  the  inquiry,  "What 
distance  from  other  buildings?"  the  answer  given  (so  far  as  material 
to  this  case)  was,  "east  side  of  the  block,  small  one  story  sheds, 
and  would  not  endanger  the  building,  if  they  should  burn."  To  the- 
inquiry,  "What  are  the  buildings  occupied  for,  that  stand  within 
four  rods  ?  how  many  buildings  are  there,  to  the  fires  of  which  this 
may  in  any  case  be  exposed?"  no  answer  was  given. 

A  verdict  was  found  for  the  plaintiff,  subject  to  the  opinion  of  the 
court  whether  the  plaintiff,  on  this  testimony,  or  so  much  of  it  as  may 
be  legally  admissible,  is  entitled  to  recover;  the  defendants'  counsel 
objecting  to  all  that  part  of  it  relating  to  the  condition  of  the  fire 
department  and  its  exertions,  and  the  statements  of  its  members 
and  others  relating  to  those  matters.  If  the  plaintiff  is  entitled  to 
recover,  judgment  is  to  be  entered  on  the  verdict;  and  if  entitled  to 
recover  interest  from  an  earlier  date  than  sixty  days  after  affidavit 
furnished  and  notice  annexed,  the  verdict  is  to  be  amended  accordingly. 

WHITMAN,  C.  J.  A  verdict  was  taken  for  the  plaintiff  subject  to 
the  opinion  of  the  court,  upon  a  report  of  the  Judge,  before  whom  the 
trial  was  had,  of  the  evidence,  and  rulings  by  him  made  in  the  progress 
of  the  trial.  And  it  is  agreed,  that  such  judgment  shall  be  entered, 
either  upon  the  verdict  or  upon  non-suit,  as  the  court  may  deem 
reasonable. 

The  action  is  upon  a  policy  of  insurance  against  fire,  underwritten 
by  the  defendants,  on  the  dwelling  house  of  the  plaintiff,  situated  in 
Bangor,  which  was  consumed  by  fire.  The  defendants,  for  their 
defense,  rely  upon  what  they  consider  to  have  been  a  misrepresentation 
made  at  the  time  the  policy  was  effected.  The  misrepresentation 
alleged  is  contained  in  the  answer  to  a  written  interrogatory,  pro- 
pounded to  the  plaintiff,  as  to  the  distance  of  other  buildings  from  the 
premises  insured.  The  answer  was  in  these  words:  "East  side  of 
the  block  are  small  one-story  woodsheds,  and  would  not  endanger 
the  buildings  if  they  should  burn." 

In  evidence  it  appeared  that  small  sheds  projected  out  from  near 
the  back  part  of  the  brick  block  of  buildings  (one  of  which  was  the 
house  in  question)  twenty-four  feet,  being  twelve  feet  in  width,  and 
eight  feet  stud;  and  leaving  a  passageway,  in  the  rear  of  them,  of 
fourteen  feet  wide,  adjoining  some  two-story  wooden  buildings, 
standing  on  another  street,  forty-nine  feet  from  the  plaintiff's  house, 
and  in  which  the  fire  which  consumed  the  plaintiff's  house  origi- 
nated. 


62  LAW  AND  BUSINESS 

The  first  question  which  arises  is,  was  this  a  misrepresentation,  or 
was  there  a  suppression  of  the  truth  tantamount  thereto,  and  material 
to  the  risk.  It  does  not  seem  to  be  necessary,  in  order  to  avail  the 
defendants  in  their  defense,  that  the  misrepresentation  or  suppression 
of  the  truth  should  have  been  wilful.  If  it  were  but  an  inadvertent 
omission,  yet  if  it  were  material  to  the  risk,  and  such  as  the  plaintiff 
should  have  known  to  be  so,  it  would  render  the  policy  void. 

In  the  case  at  bar,  it  has  now  been  rendered  undeniable,  that  the 
burning  of  the  two-story  buildings,  on  another  street,  endangered 
the  plaintiff's  house;  and  to  the  interrogatory  propounded  it  now 
would  seem  that  the  existence  of  those  buildings  might  with  propriety 
have  been  stated.  But  this  does  not  prove  that,  before  the  occurrence 
of  the  fire,  it  would  have  been  deemed  material  to  name  them,  as 
being  near  enough  to  put  the  plaintiff's  house  in  jeopardy.  It  is  not 
an  infrequent  occurrence,  after  a  disaster  has  happened,  that  we  can 
clearly  discern,  that  the  cause,  which  may  have  produced  it,  would  be 
likely  to  have  such  an  effect,  while,  if  no  such  disaster  had  occurred, 
we  might  have  been  very  far  from  expecting  it.  In  this  case  it  is 
essential  to  determine  whether  the  plaintiff  was  bound  to  have  known 
that  a  fire  originating  in  the  two-story  wooden  buildings,  would  have 
endangered  the  burning  of  his  house.  If  as  a  man  of  ordinary 
capacity,  he  ought  to  have  had  such  an  apprehension,  then  he  ought 
to  have  named  those  buildings  in  reply  to  the  interrogatory  pro- 
pounded; for  what  a  man  ought  to  have  known,  he  must  be  presumed 
to  have  known.  This  knowledge,  in  a  case  like  the  present,  must 
have  been  something  more  than  that  by  possibility  a  fire  so  originating 
might  have  endangered  his  house.  This  kind  of  knowledge  might 
exist  in  regard  to  a  fire  originating  in  almost  any  part  of  a  city  like 
Bangor;  for  a  fire  originating  in  an  extreme  part  of  it,  if  the  wind 
were  high  and  favorable  for  the  purpose,  might  endanger  all  the 
buildings,  however  remote,  standing  nearly  contiguous  one  to  another, 
to  the  leeward  of  it.  Any  danger  like  this  could  not  have  been  in 
contemplation,  when  the  interrogatory  was  propounded.  Such 
buildings  only  as  were  so  nearly  contiguous  as  to  have  been,  in 
case  a  fire  should  originate  therein,  productive  of  imminent  hazard 
to  the  safety  of  the  plaintiff's  dwelling,  could  have  been  in  view  by 
the  defendants.  And  the  question  is,  were  the  two-story  wooden 
buildings  of  that  description  ? 

In  reference  to  this  question,  it  may  not  be  unimportant  to 
consider,  that  the  defendants,  at  the  time  when  this  policy  was  effected, 


DEVICES  FOR  SHIFTING  RISKS  63 

had  an  agent  residing  in  Bangor,  whose  business  it  was  to  attend, 
in  their  behalf,  to  the  applications  for  insurance  from  that  quarter. 
It  may  be  believed,  that  the  selection  of  this  individual  was  the  result 
of  knowledge  with  regard  to  his  intelligence  and  capacity  for  such 
purpose.  It  was  not,  however,  his  business,  perhaps,  to  prepare 
representations  to  be  made  by  applicants  for  insurance.  But  it  did 
so  happen,  that  he  assisted  the  plaintiff  in  preparing  the  answers  to 
the  standing  interrogatories,  one  of  which  is  the  interrogatory  before 
named,  intended  to  produce  a  representation  upon  which  to  found 
the  estimates  of  the  propriety  of  assuming  the  risks  proposed.  He, 
it  seems,  examined  the  premises,  looked  at  the  wood  sheds,  and  the 
two-story  wooden  buildings  beyond  them.  To  him  it  did  not  seem 
to  have  occurred,  that  the  vicinity  of  those  buildings  was  such  as  to 
render  it  necessary  that  the  two-story  wooden  buildings  should  be 
named  in  answer  to  the  interrogatory;  for  he,  at  the  request  of  the 
plaintiff,  penned  the  reply  thereto  as  he  thought  proper. 

It  does  not  appear  that  any  witness  has  testified  that,  anterior 
to  the  disaster,  he  should  have  anticipated  such  an  event  as  within 
the  range  of  probability.  What  other  individuals  of  intelligence  did 
not  foresee  to  be  likely  to  occur,  could  not  be  expected  to  know,  he 
cannot  be  considered  as  culpable  for  not  knowing.  And  what  he  could 
not  be  expected  to  apprehend,  he  could  not  be  bound  to  communicate; 
and,  in  not  communicating  any  such  fact,  he  could  not  be  considered 
as  guilty  of  concealing  it,  even  inadvertently,  and  much  less  wilfully. 

As  to  the  wooden  sheds,  they  were  named;  and  the  description 
given  of  them  is  precisely  in  conformity  to  the  truth.  They  were 
named,  however,  in  connection  with  an  opinion,  that  if  they  took 
fire,  they  would  not  endanger  the  house.  There  is,  then,  no  mis- 
representation with  regard  to  their  existence.  The  misrepresentation 
complained  of,  in  reference  to  them,  is  merely  in  matter  of  opinion. 
But  opinions,  if  honestly  entertained,  and  honestly  communicated, 
are  not  misrepresentations,  however  erroneous  they  may  prove  to  be. 
That  this  opinion  was  uttered  bona  fide,  and  in  perfect  singleness  of 
heart  and  purpose,  may  well  be  believed,  and  may  fairly  be  deducible 
from  the  fact  that  it  was  expressed  in  concurrence  with  the  unquestion- 
able belief,  at  the  time,  of  its  correctness  by  the  confidential  friend 
of  the  defendants.  An  opinion  so  uttered,  if  not  in  good  faith,  might 
well  be  complained  of,  as  it  might  tend  to  throw  the  defendants  off 
their  guard.  In  such  case,  it  might  tend  to  show  a  fraudulent  design; 
and  in  connection  with  evidence  of  misrepresentation  of  facts,  even 


64  LAW  AND  BUSINESS 

short  of  what  otherwise  might  be  necessary  to  vacate  a  contract, 
would  be  likely  to  have  that  effect. 

But  it  is  by  no  means  clear,  if  the  fire  had  not  originated  elsewhere 
than  in  the  sheds,  that  it  would  have  been  attended  with  essential 
danger  to  the  main  building.  The  neighbors  and  firemen  of  the  city 
might  be  expected  to  be  able  to  extinguish  a  fire  so  originating.  Such 
buildings  are  easily  pulled  to  pieces;  and  an  engine  brought  to  bear 
upon  them  would  do  great  execution.  It  may,  therefore,  even  now 
be  very  questionable,  whether  the  opinion  complained  of  may  not  be 
adopted  as  well  as  founded  to  a  very  considerable  extent  at  least. 

As  to  the  testimony  of  the  witnesses,  touching  the  condition  of 
the  fire  department  and  its  exertions,  and  whatever  relates  thereto, 
we  see  no  ground,  from  thence  arising,  to  question  the  correctness  of 
the  finding  of  the  jury.  The  most  that  can  be  said  of  that  part  of  the 
evidence  is,  that  it  is  irrelevant,  and  not  of  a  tendency  to  influence 
a  jury  one  way  or  the  other. 

We  are  of  opinion,  therefore,  that  judgment  must  be  entered 
upon  the  verdict,  with  interest  as  agreed. 

QUESTIONS 

1.  What  was  the  issue  under  consideration  in  this  case?    Was  it  whether 
there  was  a  misrepresentation  of  fact  or  whether  the  fact  misrepresented 
was  material  to  the  risk  ? 

2.  What  is  the  effect  of  an  innocent  misrepresentation  of  a  material  fact  in 
an  ordinary  simple  contract  ?    If  a  different  rule  is  applicable  to  insur- 
ance contracts,  what  is  the  justification  for  it? 

3.  P,  an  applicant  for  insurance  in  his  house,  with  intent  to  deceive  the 
insurer,  volunteered  the  information  that  he  was  the  owner  of  the 
property.    As  a  matter  of  fact  X  held  a  mortgage  on  the  premises.     P 
sues  D  for  a  loss  under  the  policy.    The  court  instructed  the  jury  that 
a  fraudulent  misrepresentation  of  fact  rendered  the  contract  voidable 
even  though  the  insurer  did  not  rely  on  the  misrepresentation.    Judg- 
ment was  given  for  D.    P  appeals  and  assigns  the  instruction  as  error. 
What  decision  ? 

4.  P,  in  his  application  for  insurance,  was  asked  to  state  the  value  of  the 
property.    He  valued  the  property  at  $5,000.    This  was  an  innocent 
overstatement  of  the  value  by  $1,000.    P  sues  D  for  a  loss  under  the 
policy.    The  court  instructed  the  jury  that  an  innocent  misrepresenta- 
tion of  a  fact  would  not  avoid  the  policy  even  though  it  was  relied  upon 
by  the  insurer  in  assuming  the  risk.    Judgment  was   given    for   P. 
D  appeals  and  assigns  the  instruction  as  error.    What  decision  ? 

5.  What  is  the  test  of  the  materiality  of  facts  concerning  which  a  misrepre- 
sentation may  be  made  ? 


DEVICES  FOR  SHIFTING  RISKS  65 

KIMBAL.L  v.  AETNA  INSURANCE  COMPANY 
91  Massachusetts  Reports  540  (1865) 

Two  actions  of  contract  on  policies  of  insurance  issued  by  the 
defendants  respectively  upon  a  dwelling-house  of  the  plaintiff~m~ 
Bradford,  dated  January  17,  1862,  and  payable  in  case  of  loss  to 
Jacob  Kimball,  mortgagee. 

The  judge  ruled  that  the  representations,  if  proved,  would  not 
constitute  a  legal  defence,  and  instructed  the  jury  to  return  verdicts 
for  the  plaintiff,  which  was  accordingly  done.  The  defendants 
alleged  exceptions. 

GRAY,  J.  The  contract  of  insurance  is  a  contract  to  indemnify 
the  owner  of  certain  property  against  certain  risks.  This  contract 
is  founded  upon  the  representations  previously  made  by  the  assured 
to  the  insurer.  The  condition  and  circumstances  of  the  property 
are  within  the  knowledge  of  the  owner  more  than  of  the  insurer,  and 
must  be  truly  represented  by  the  former  to  the  latter,  in  order  that 
he  may  estimate  the  risk  before  entering  into  the  contract.  In  making 
this  representation,  the  utmost  good  faith  is  required.  If  an  existing 
fact  material  to  the  risk  is  misrepresented  by  the  owner  to  the  under- 
writer, the  minds  of  the  parties  never  meet,  they  agree  on  no  subject- 
matter  to  which  the  contract  can  attach,  the  contract  founded  on 
such  misrepresentation  never  takes  effect,  the  underwriter  may  treat 
it  as  a  nullity,  and  the  other  party,  unless  chargeable  with  fraud,  may 
recover  back  the  premium.  If  representations,  whether  oral  or 
written,  concerning  facts  existing  when  the  policy  is  signed,  are  false, 
it  never  has  any  existence  as  a  contract,  unless  it  contains  in  itself 
terms  which  expressly  or  by  necessary  implication  waive  or  supersede 
the  previous  representations.  If  the  representations  are  positive 
and  not  of  mere  opinion  or  belief,  it  matters  not  whether  they  are 
made  at  or  before  the  time  of  the  execution  of  the  policy,  nor  whether 
they  are  expressed  in  the  present  or  the  future  tense,  if  they 
relate  to  what  the  state  of  facts  is  or  will  be  when  the  policy  is  executed 
and  the  risk  of  the  underwriter  begins.  If  the  facts  are  then  materially 
different  from  the  representations,  the  whole  foundation  of  the 
contract  fails,  the  risk  does  not  attach,  the  policy  never  becomes  a 
contract  between  the  parties.  Representations  of  facts  existing  at 
the  time  of  the  execution  of  the  policy  need  not  be  inserted  in  it; 
for  they  are  not  necessary  parts  of  it,  but  as  is  sometimes  said,  col- 
lateral to  it.  They  are  its  foundation;  and  if  the  foundation  does  not 
exist,  the  superstructure  does  not  arise.  Falsehood  in  such  representa- 


66  LAW  AND  BUSINESS 

tions  is  not  shown  to  vary  or  add  to  the  contract,  or  to  terminate  a 
contract  which  has  once  been  made;  but  to  show  that  no  contract 
has  ever  existed. 

The  word  "representations"  has  not  always  been  confined  in  use 
to  representations  of  facts  existing  at  the  time  of  making  the  policy; 
but  has  been  sometimes  extended  to  statements  made  by  the  assured 
concerning  what  is  to  happen  during  the  term  of  the  insurance; 
in  other  words,  not  to  the  present,  but  to  the  future;  not  to  facts 
which  any  human  being  knows  or  can  know,  but  to  matters  of  expecta- 
tion or  belief,  or  of  promise  and  contract.  Such  statements  (when 
not  expressed  in  the  form  of  a  distinct  and  explicit  warranty  which 
must  be  strictly  complied  with)  are  sometimes  called  "promissory 
representations"  to  distinguish  them  from  those  relating  to  facts, 
or  "affirmative  representations."  And  these  words  express  the 
distinction;  the  one  is  an  affirmation  of  a  fact  existing  when  the  con- 
tract begins;  the  other  is  a  promise,  to  be  performed  after  the 
contract  has  come  into  existence.  Falsehood  in  the  affirmation 
prevents  the  contract  from  ever  having  any  life;  breach  of  the 
promise  could  only  bring  it  to  a  premature  end.  A  promissory 
representation  may  be  inserted  in  the  policy  itself;  or  it  may  be  in 
the  form  of  a  written  application  for  insurance,  referred  to  in  the 
policy  in  such  a  manner  as  to  make  it  in  law  a  part  thereof;  and  in 
either  case  the  whole  instrument  must  be  construed  together.  But 
this  written  instrument  is  the  expression,  and  the  only  evidence,  of 
the  duties,  obligations,  and  promises  to  be  performed  by  each  party 
while  the  insurance  continues.  To  make  the  continuance  or  termina- 
tion of  a  written  contract,  which  has  once  taken  effect,  dependent  on 
the  performance  or  breach  of  an  earlier  oral  agreement  would  be 
to  violate  a  fundamental  rule  of  evidence.  A  representation  that  a 
fact  now  exists  may  be  either  oral  or  written;  for  if  it  does  not  exist, 
there  is  nothing  to  which  the  contract  can  apply.  But  an  oral 
representation  as  to  a  future  fact,  honestly  made,  can  have  no  effect; 
for  if  it  is  a  mere  statement  of  an  expectation,  subsequent  disappoint- 
ment will  not  prove  that  it  is  untrue;  and  if  it  is  a  promise  that  a 
certain  state  of  facts  shall  exist  or  continue  during  the  term  of  the 
policy,  it  ought  to  be  embodied  in  the  written  contract. 

In  the  cases  now  before  us,  there  was  no  representation  that  the 
house  was  already  occupied,  and  no  representation  or  agreement  that 
it  should  be  occupied  the  instant  the  policies  took  effect.  The 
plaintiff's  statement  was  that  "the  house  would  be  occupied;  that 


DEVICES  FOR  SHIFTING  RISKS  67 

he  had  a  man  in  view  who  was  going  to  occupy  it."  There  is  nothing 
to  show  that  this  statement  was  not  made  in  the  most  perfect  good 
faith.  Giving  it  the  strongest  possible  interpretation  against  the 
plaintiff,  it  was  a  promise  that  the  house  should  be  occupied  withirr 
a  reasonable  time,  and  the  policies  attached  as  soon  as  they  were 
made  and  continued  in  force  until  such  reasonable  time  had  elapsed. 
The  policies,  having  once  taken  effect,  cannot  be  terminated  or  avoided 
in  the  absence  of  fraud,  by  the  subsequent  breach  of  an  oral  agreement 
made  before  they  were  executed.  The  cases  come  exactly  within 
the  rule  laid  down  by  Chief  Justice  SHAW,  and  confirmed  by  the 
opinion  of  the  whole  court,  in  Bryant  v.  Ocean  Insurance  Co.:  "The 
evidence  offered  was  not  admissible  for  any  other  purpose  than  to 
prove  a  fraudulent  intent  on  the  part  of  the  insured  to  mislead  the 
defendants  and  to  induce  them  to  take  the  risk,  or  to  take  it  at  a  lower 
premium  than  they  otherwise  would  have  done;  as  a  representation, 
not  of  a  fact,  but  of  an  intention,  it  did  not  avoid  the  policy,  unless 
made  with  a  fraudulent  intent;  as  it  related  solely  to  the  employment 
of  the  vessel  within  the  time  for  which  she  was  insured,  it  was  not  of 
an  independent  or  collateral  fact  affecting  the  risk,  but  was  embraced 
in  the  terms  of  the  contract,  and  must  be  considered  as  absorbed  in 
the  contract  afterward  formally  executed,  or  as  by  mutual  consent 
withdrawn  and  waived  by  the  execution  of  the  policy."  22  Pick.  201. 
This  subject  illustrates  the  wisdom  of  the  common  law  in  taking 
for  its  guides  judicial  opinions,  given  after  argument,  under  the 
responsibility  of  determining  the  rights  of  parties  in  actual  con- 
troversies, rather  than  the  theories  of  scholars  and  commentators, 
however  learned  or  acute. 

Exceptions  overruled. 

QUESTIONS 

1.  What  is  the  difference  between  an  affirmative  representation  and  a 
promissory  representation  ? 

2.  Suppose  that  the  defendants  could  have  shown  that  the  plaintiff,  at  the 
time  he  made  the  statement  under  consideration,  never  intended  that 
the  house  should  be  occupied,  what  would  have  been  the  decision  of  the 
court  in  this  case  ? 

3.  P  applied  to  D  for  insurance  on  a  certain  building.    He  orally  promised 
that  he  would  take  out  an  equal  amount  of  insurance  in  the  X  Company. 
This  he  failed  to  do.    P  sues  D  for  a  loss  under  the  policy.    What 
decision  ? 


68  LAW  AND  BUSINESS 

4.  P  applies  for  insurance  on  his  house.    He  makes  an  innocent  misrepre- 
sentation of  a  material  fact.    The   company  avoids  the  policy.    P 
sues  for  the  return  of  the  premiums  which  he  has  already  paid.    What 
decision  ? 

5.  P  applies  for  insurance  on  his  life.    P,  with  knowledge  of  its  falsity  and 
with  intent  to  deceive  the  insurer,  states  that  he  has  never  consulted  a 
physician  about  his  health.    What  decision  in  an  action  on  the  policy 
by  P's  personal  representative  ? 

d)     Operation  of  the  Contract  of  Insurance 

I.      AS  TO  PARTIES 

I)    Assignees 

CONTINENTAL  INSURANCE  CO.  v.  MUNNS 
120  Indiana  Reports  30  (1889) 

MITCHELL,  J.  It  is  abundantly  settled  that  upon  a  sale  and 
transfer  of  property  covered  by  a  policy  of  insurance,  and  an  assign- 
ment of  the  policy  to  the  purchaser,  duly  assented  to  by  the  company, 
a  new  and  original  contract  of  indemnity  arises  between  the  insurance 
company  and  the  assignee,  which  the  latter  may  enforce  without 
regard  to  what  may  have  occurred  prior  to  the  assignment.  The 
policy,  it  is  said,  in  such  a  case,  expires  with  the  transfer  of  the  estate, 
so  far  as  it  relates  to  the  original  holder,  but  the  assignment  and 
assent  of  the  company  thereto  constitute  an  independent  contract 
with  the  purchaser  and  assignee,  the  same  in  effect  as  if  the  policy 
had  been  reissued  to  him  upon  the  terms  and  conditions  therein 
expressed.  Wilson  v.  Hill,  3  Mete.  66;  Fogg  v.  Middlesex,  etc.,  Ins. 
Co.,  10  Cush.  337;  Flanagan  v.  Camden,  etc.,  Ins.  Co.,  i  Dutch. 
(N.J.)  506;  Cummings  v.  Cheshire,  etc.,  Ins.  Co.,  55  N.H.  457; 
Steen  v.  Niagara,  etc.,  Ins.  Co.,  89  N.Y.  315;  Shearman  v.  Niagara, 
etc.,  Ins.  Co.,  46  N.Y.  526;  Hooper  v.  Hudson  River,  etc.,  Ins.  Co., 
17  N.Y.  424;  Ellis  v.  Council  Bluffs  Ins.  Co.,  64  Iowa,  507;  Wood- 
Insurance,  sees,  no,  366. 

Where  an  estate  is  sold  and  the  policy  transferred  to  the  purchaser 
and  upon  notice  to  the  insurer  he  assents  to  it,  a  new  and  original 
contract  of  indemnity  arises  to  the  assignee,  which  he  may  enforce  in 
his  own  name.  The  policy  in  such  case  expires  with  the  transfer 
of  the  title  to  the  estate,  but  the  assent  of  the  insurer  to  the  assignment 
of  the  policy  constitutes  a  new  contract.  Pratt  v.  New  York,  etc.,  Ins. 
Co.,  64  Barb.  589;  Flanders,  Fire  Ins.,  412,  484;  Foster  v.  Equitable, 
etc.,  Ins.  Co.,  2  Gray,  216. 


DEVICES  FOR  SHIFTING  RISKS  69 

Aside  from  the  prohibitory  clause,  policies  of  insurance,  prior 
to  any  loss,  are  not,  in  their  nature,  assignable  from  one  person  to 
another  without  the  express  consent  of  the  insurance  company  issuing 
them.  They  are  therefore  subject  to  the  common-law  rule,  -fhe- 
effect  of  which  is,  that  where  the  assignee  of  a  contract  gives  notice 
of  the  assignment  to  the  other  party  to  the  instrument,  and  the  latter 
assents  to  it,  the  transaction  constitutes  a  new  engagement  between 
one  of  the  parties  to  the  contract  and  the  assignee  of  the  other,  the 
terms  of  which  are  regulated  and  fixed  by  the  original  contract.  Fogg 
v.  Middlesex,  etc.,  Ins.  Co.,  supra;  Wilson  v.  Hill,  supra;  Hooper  v. 
Hudson  River  *&tc.,  Ins.  Co.,  supra;  Flanders,  Insurance,  484. 

In  order  that  a  policy  of  insurance  may  be  effectual,  the  insured 
must  have  an  interest  in  the  property  covered  by  the  contract  of 
insurance,  not  only  when  the  contract  is  entered  into,  but  when  the 
loss  occurs.  If  the  interest  in  the  property  and  the  interest  in  the 
policy  become  separated,  the  operation  of  the  policy  becomes  sus- 
pended, and  if  a  loss  occurs  while  the  policy  is  thus  suspended,  no 
recovery  can  be  had.  An  assignment  of  an  insurance  policy  without 
a  transfer  of  the  property  insured,  would  be  an  idle  ceremony  so  far 
as  transferring  to  the  assignee  any  beneficial  interest  in  the  contract. 
On  the  other  hand,  the  transfer  of  the  property  insured  suspends  the 
operation  of  the  policy,  which  becomes  inoperative  for  want  of  a 
subject-matter  to  act  upon,  until  by  the  assignment  and  assent  of 
the  company  a  new  contract  of  insurance,  embodying  the  same  terms 
and  conditions  as  the  old,  arises  between  the  latter  and  the  purchaser. 
The  contract  of  insurance  thus  consummated  arises  directly  between 
the  purchaser  and  the  insurance  company,  to  all  intents  and  pur- 
poses the  same  as  if  a  new  policy  had  been  issued  embracing  the  terms 
of  the  old.  In  such  a  case  no  defence  predicated  on  supposed  violations 
of  the  conditions  of  the  policy  by  the  assignor  will  be  available  against 
the  assignee.  Until  the  latter  himself  does  some  act,  or  permits  a 
condition  of  things  to  exist  in  violation  of  the  terms  of  the  policy* 
he  is  not  in  default.  Ellis  v.  State  Ins.  Co.,  68  Iowa,  578  (56  Am. 
R.  865)  and  Insurance  Co.  v.  Garland,  108  111.  220,  are  not  opposed  to 
the  conclusions  stated  above. 

QUESTIONS 

i.  P  effects  insurance  on  his  house  in  the  sum  of  $5,000.  He  assigns  the 
policy  to  X.  (a)  X  sues  the  insurer  for  a  loss  under  the  policy.  (6)  P 
sues  on  the  policy.  What  decision  in  each  case? 


70  LAW  AND  BUSINESS 

2.  In  the  foregoing  case,  P  sells  the  property  to  X  but  does  not  assign  the 
policy  to  him.     (a)  X  sues  on  the  policy  for  a  loss,     (b)  P  sues  on  the 
policy.    What  decision  in  each  case? 

3.  P  sells  the  property  to  X  and  assigns  the  policy  to  him.    X  sues  the 
insurer  for  a  loss  under  the  policy.    What  decision  ? 

4.  P  insures  his  house  in  the  sum  of  $5,000.    He  indorses  on  the  policy, 
"In  case  of  loss,  pay  the  same  to  X,"  and  delivers  the  policy  to  X.    A 
loss  occurs  under  the  policy.    X  sues  for  the  loss.    What  decision  ? 

5.  In  the  foregoing  case,  the  insurer  pleads  and  proves  that  P  violated  a  con- 
dition in  the  policy  by  keeping  gasoline  on  the  premises.    What  decision 
in  an  action  by  X  on  the  policy  ? 

6.  P  sells  the  insured  property  to  X  and  assigns  the  policy  to  him.    The 
company  assents  to  the  assignment.    P  sues  the  company  on  the  policy. 
What  decision  ? 

7.  In  the  foregoing  case,  the  company  pleads  that  P,  previous  to  the  assign- 
ment, had  violated  a  condition  in  the  policy.    What  decision  ? 

8.  P  effects  insurance  on  a  building  which  he  owns.    There  was  the  follow- 
ing clause  in  the  policy:   "If  the  applicant  shall  mortgage  or  otherwise 
incumber  the  same  without  the  consent  of  the  company,  the  policy 
shall  be  void."    P  mortgaged  the  property  to  Y.    Thereafter,  he  sold 
the  property  and  assigned  the  policy,  with  the  assent  of  the  company,  to 
X.    X  sues  for  a  loss  under  the  policy.    The  company  contends  that  the 
policy  is  void  because  of  the  mortgage  on  the  premises.    What  decision  ? 

MUTUAL  LIFE  INSURANCE  COMPANY  OF  NEW  YORK  v. 

ALLEN 

138  Massachusetts  Reports  24  (1884) 

W.  ALLEN,  J.  The  contract  of  insurance  was  made  and  was  to  be 
performed  in  this  state,  and  the  money  due  upon  it  has  been  paid 
into  court  here;  and  the  contract  of  assignment  was  made  in  this  state 
between  parties  domiciled  here.  The  validity  and  effect  of  the  assign- 
ment, and  the  capacity  of  the  parties  to  it,  must  be  governed  by  the 
laws  of  this  state.  The  only  question  which  requires  discussion  is 
whether  by  that  law  the  assignment  is  void  for  want  of  interest  of  the 
assignee  in  the  life  insured. 

The  policy,  in  consideration  of  an  annual  premium  to  be  paid  by 
Mrs.  Fellows,  assured  the  life  of  her  husband  for  her  sole  use,  and  for 
her  children,  if  she  should  survive  her  husband.  The  promise  was 
to  the  assured,  her  executors,  administrators,  and  assigns.  The 
policy  contained  no  reference  to  an  assignment  except  the  following: 
"N.B. — If  assigned,  notice  to  be  given  to  this  company."  The 
policy  was  issued  in  1855.  In  1 88 1,  an  assignment  in  the  words 


DEVICES  FOR  SHIFTING  RISKS  71 

following,  signed  by  Mrs.  Fellows,  her  husband,  and  children  (who 
were  all  of  age)  was  indorsed  upon  the  policy,  "I  hereby  assign  and 
transfer  over  unto  George  Allen,  of  Boston,  all  my  right,  title  and 
interest  in  and  to  the  within  policy  of  life  insurance,  and  all  right 
that  may  at  any  time  be  coming  to  me  thereon." 

A  more  formal  instrument  of  assignment,  with  a  power  of  attorney 
to  receive  "all  sums  of  money  that  may  at  any  time  hereafter  be  or 
become  due  and  payable  to  us,  or  either  of  us,  by  the  terms  of  said 
policy,"  was  also  executed  by  the  same  parties.  The  policy  and 
assignments  were  delivered  to  the  defendant  Allen,  and  notice  thereof 
given  to  the  plaintiff.  The  consideration  of  the  assignment  was 
the  payment  of  a  sum  of  money  by  the  assignee,  and  the  discharge  of 
certain  notes  held  by  him  against  Mr.  Fellows.  It  is  to  be  assumed, 
on  the  report,  that  the  transaction  was  not,  in  the  intention  of  the 
parties,  a  wagering  contract,  but  an  honest  and  bona  fide  sale  of  the 
equitable  interest  in  the  policy.  The  defendant  Allen  had  no  insur- 
able  interest  in  the  life  of  Mr.  Fellows  except  as  his  creditor  by 
accepting  the  assignment  in  satisfaction  of  his  debt,  so  that  he  is  in 
the  position  of  a  bona  fide  assignee  of  the  policy  for  valuable  con- 
sideration without  interest  in  the  life  insured,  and  the  question 
between  him  and  the  assignor  is  which  has  the  equitable  interest  in 
the  policy. 

The  policy  is  a  common  form  of  what  is  called  life  insurance,  and 
is  a  contract  by  which  the  insurer,  in  consideration  of  an  annual 
payment  to  be  made  by  the  assured,  promises  to  pay  to  her  a  certain 
sum  upon  the  death  of  the  person  whose  life  is  insured.  To  prevent 
this  from  being  void,  as  a  mere  wager  upon  the  continuance  of  a  life 
in  which  the  parties  have  no  interest  except  that  created  by  the  wager 
itself,  it  is  necessary  that  the  assured  should  have  some  pecuniary 
interest  in  the  continuance  of  the  life  insured.  It  is  not  a  contract  of 
indemnity  for  actual  loss  but  a  promise  to  pay  a  certain  sum  on  the 
happening  of  a  future  event  from  which  loss  or  detriment  may  ensue, 
and  if  made  in  good  faith  for  the  purpose  of  providing  against  a 
possible  loss,  and  not  as  a  cloak  for  a  wager,  is  sustained  by  any 
interest  existing  at  the  time  the  contract  is  made.  See  Loomis  v. 
Eagle  Ins.  Co.,  6  Gray  396,  and  Forbes  v.  American  Ins.  Co.,  15  Gray 
249.  Mrs.  Fellows  had  an  insurable  interest  in  the  life  of  her  husband, 
and  the  policy  to  her  was  a  valid  contract  to  pay  the  sum  insured  to 
her  upon  the  event  of  his  death.  This  contract  was  a  chose  in  action 
assignable  by  her.  Palmer  v.  Merrill,  6  Cush.  282. 


72  LAW  AND  BUSINESS 

The  policy  was  not  negotiable,  and  her  assignment  could  not,  in 
this  state,  pass  the  legal,  but  only  the  equitable  interest  in  the  contract. 
The  assignment  was  a  contract  between  her  and  her  assignee,  to 
which  the  insurer  was  not  a  party.  It  purported  to  give  to  the 
assignee  only  the  equitable  interest  of  the  assignor  in  the  contract — 
the  right  to  recover  in  the  name  of  the  assignor  the  sum  which  should 
come  due  to  her  under  the  contract. 

The  direction  in  the  policy,  that  notice  of  an  assignment  of  it 
should  be  given  to  the  insurer,  had  no  effect  upon  the  character  of 
the  assignment,  however  its  operation  might  have  been  limited  had 
notice  not  been  given.  The  assent  of  the  insurer  to  the  assignment 
would  not  make  a  new  contract  of  insurance.  Its  only  effect  would 
be  to  enable  the  assignee  to  enforce  in  his  own  name,  instead  of  the 
name  of  the  assignor,  the  rights  she  held  under  the  contract 
McCluskey  v.  Providence  Washington  Ins.  Co.,  126  Mass.  306. 

This  distinction  between  the  assignment  of  the  interest  of  the 
insured  in  a  policy,  which  is  a  contract  between  the  assignor  and  the 
assignee  only,  and  the  transfer  or  renewal  to  a  third  person  of  a  policy, 
which  is  a  contract  to  which  the  insurer  is  a  party,  is  illustrated  in 
the  case  of  fire  insurance.  That  is  strictly  a  personal  contract  of 
indemnity  to  the  assured,  and  he,  or  his  assigns  in  his  name,  can 
recover  only  an  indemnity  for  actual  loss  to  him.  If  he  has  no  interest 
in  the  property  insured  at  the  time  of  the  loss,  he  can  recover  nothing, 
and  if  he  parts  with  his  interest  before  a  loss,  he  becomes  incapacitated 
to  recover  upon  the  policy,  and  the  policy  ceases  to  insure  anything  and 
becomes  void.  Wilson  v.  Hill,  3  Met.  66.  It  follows  that,  where  a  pur- 
chaser of  insured  property  would  have  the  benefit  of  an  unexpired  term 
of  insurance,  it  must  be  by  a  new  contract  with  the  insurer,  and  not 
by  assignment  from  the  insured.  This  is  usually  provided  for  in  the 
policy,  so  that  by  its  terms  an  assignment  by  the  insured  with  the 
assent  of  the  insurer  will  continue  the  policy  to  the  purchaser;  but 
in  such  a  case  there  is  a  new  contract  of  insurance  with  the  purchaser 
upon  his  newly  acquired  interest,  and  he  becomes  the  assured.  But 
the  assured  in  a  fire  policy  can,  while  his  insurance  continues,  assign 
his  rights  under  the  policy  in  the  same  manner  as  the  insured  in  a  life 
policy  can  do.  In  Fogg  v.  Middlesex  Ins.  Co.,  10  Cush.  337,  CHIEF 
JUSTICE  SHAW  says,  after  referring  to  the  kind  of  transfer  just  men- 
tioned: "But  there  is  another  species  of  assignment,  or  transfer  it 
may  be  called,  in  the  nature  of  an  assignment  of  a  chose  in  action; 
it  is  this:  '  In  case  of  loss,  pay  the  amount  to  A.B.'  It  is  a  contingent 


DEVICES  FOR  SHIFTING  RISKS  73 

order  or  assignment  of  the  money  should  the  event  happen  upon  which 
money  will  become  due  on  the  contract.  If  the  insurer  assents  to  it, 
and  the  event  happens,  such  assignee  may  maintain  an  action  in  his 
own  name,  because,  upon  notice  of  the  assignment,  the  insurer  Iras- 
agreed  to  pay  the  assignee  instead  of  the  assignor.  But  the  original 
contract  remains;  the  assignment  and  assent  to  it  form  a  new  and 
derivative  contract  out  of  the  original.  But  the  contract  remains  as 
a  contract  of  guaranty  to  the  original  assured;  he  must  have  an 
insurable  interest  in  the  property,  and  the  property  must  be  his  at 
the  time  of  the  loss.  The  assignee  has  no  insurable  interest,  prima 
facie,  in  the  property  burnt,  and  does  not  recover  as  the  party  insured, 
but  as  the  assignee  of  a  party  who  has  an  insurable  interest  and  a  right 
to  recover,  which  right  he  has  transferred  to  the  assignee,  with  the 
consent  of  the  insurers."  See  also  Phillips  v.  Merrimack  Ins.  Co., 
10  Cush.  350. 

If  Mrs.  Fellows  had  surrendered  or  forfeited  her  policy,  and  the 
contract  between  her  and  the  insurer  had  become  null,  a  new  contract, 
by  which  the  defendant  Allen  should  have  become  the  assured  instead 
of  Mrs.  Fellows,  might  have  required  an  insurable  interest  in  him, 
though  in  the  form  of  an  assignment  and  a  renewal  or  revival  of  the 
original  policy.  But  the  original  policy  has  not  been  surrendered 
or  forfeited,  nor  the  contract  in  any  way  changed.  Mrs.  Fellows  is 
still  the  assured,  and  the  policy  is  supported  by  her  interest  in  the 
life,  and  is  in  form  payable  to  her.  If  the  assignment  is  valid,  it  is 
payable  to  her  in  trust  for  the  assignee;  if  void,  for  her  own  use.  In 
no  respect  can  the  assignment  affect  the  validity  of  the  contract  of 
insurance,  or  taint  that  as  a  wagering  policy.  The  only  question 
that  can  be  raised  is  as  to  the  assignment  itself— whether,  as  between 
the  parties  to  it,  it  is  void  as  a  gaming  contract. 

That  a  right  to  receive  money  upon  the  death  of  another  is 
assignable  at  law  or  in  equity  will  not  be  questioned.  The  right  of 
Mrs.  Fellows,  under  our  law,  to  assign  the  equitable  interest  in  the 
policy  in  question  is  not  denied;  but  it  is  contended  that  she  can 
assign  it  only  to  someone  who  has  an  insurable  interest  in  the  life  of 
Mr.  Fellows.  We  find  no  reason  for  this  exceptional  limitation  of  the 
right  of  assignment,  which  would  allow  Mrs.  Fellows  to  assign  her 
policy  to  Mr.  Fellows,  or  his  creditors  or  dependent  relatives,  but 
would  forbid  her  to  pledge  it  for  her  own  debts,  or  sell  it  for  her  own 
advantage.  If  there  is  any  such  reason,  it  must  be  found  in  the 
contract  of  assignment  itself,  and  irrespective  of  the  rule  that  the 


74  LAW  AND  BUSINESS 

original  contract  must  be  supported  by  an  interest  in  the  life  insured. 
That  rule  was  satisfied.  Whether  a  similar  rule  affects  the  contract 
between  the  assignor  and  assignee  must  depend  upon  considerations 
applicable  to  that  contract  alone. 

One  objection  urged  is,  that  it  gives  to  the  assignee  an  interest 
in  the  death  of  the  person  whose  life  is  insured,  without  a  counter- 
balancing interest  in  his  life.  It  is  true  that  every  person  who  is  in 
expectation  of  property  at  the  death  of  another  has  an  interest  in 
his  .death,  but  it  does  not  follow,  and  it  not  true,  that  the  law  does 
not  allow  the  possession  and  assignment  of  such  expectation,  nor 
that  an  insurable  interest  is  required  in  a  life  insurance  for  the  purpose 
of  protecting  the  life  insured.  The  objection  applies  with  equal 
force  to  the  assignment  of  a  provision  made  for  one  upon  the  death  of 
another  by  deed  or  will  as  to  the  assignment  of  a  like  provision  in  the 
form  of  a  life  insurance. 

The  other  objection  urged  is,  that  such  transactions  may  lead  to 
gaming  contracts.  This  does  not  meet  the  question,  which  is  whether 
such  an  assignment  is  in  itself  illegal  as  a  wagering  contract.  Most 
contracts  have  an  element  of  gambling  in  them.  There  is  uncertainty 
in  the  value  of  any  contract  to  deliver  property  at  a  future  day,  and 
great  uncertainty  in  the  present  value  of  an  annuity  for  a  particular 
life,  or  of  a  sum  payable  in  the  event  of  a  particular  death,  and  such 
contracts  and  rights  are  often  used  for  gambling  purposes.  The  ques- 
tion is  whether  the  right  to  a  sum  of  money  payable  on  the  death  of 
a  person  under  a  contract  in  the  form  of  an  insurance  policy  has 
any  special  character  or  quality  which  renders  it  less  assignable  than 
the  right  to  a  sum  payable  at  the  death  of  the  same  person  under 
any  other  contract  or  assurance,  or  than  a  remainder  in  real  estate 
expectant  on  such  death.  We  see  nothing  in  the  contract  of  life 
insurance  which  will  prevent  the  assured  from  selling  his  right  under 
the  contract  for  his  own  advantage,  and  we  are  of  opinion  that  an 
assignment  of  a  policy  made  by  the  assured  in  good  faith  for  the 
purpose  of  obtaining  its  present  value,  and  not  as  a  gaming  risk 
between  him  and  the  assignee,  or  a  cover  for  a  contract  of  insurance 
between  the  insurer  and  the  assignee,  will  pass  the  equitable  interest 
of  the  assignor;  and  that  the  fact  that  the  assignee  has  no  insurable 
interest  in  the  life  insured  is  neither  conclusive  nor  prima  facie 
evidence  that  the  transaction  is  illegal. 

Several  cases  have  been  cited  as  deciding  that  any  assignment  of 
a  life  policy  to  one  who  has  no  interest  in  the  life  is  void. 


DEVICES  FOR  SHIFTING  RISKS  75 

We  will  notice  them  briefly.  Cammack  v.  Lewis,  15  Wall.  643, 
and  Warnock  v.  Davis,  104  U.S.  775  were  both  cases  in  which  the 
policies  were  taken  out,  by  the  procurement  of  the  assignees  in  order 
that  they  might  be  assigned  to  them,  under  such  circumstances~as~ 
that  they  might  well  be  held  to  be  in  evasion  of  the  law  prohibiting 
gaming  policies.  The  remark  of  Mr.  JUSTICE  FIELD  in  the  latter  case, 
that  "  the  assignment  of  a  policy  to  a  party  not  having  an  insurable 
interest  is  as  objectionable  as  the  taking  out  of  a  policy  in  his  name," 
was  not  necessary  to  the  decision.  In  Franklin  Ins.  Co.  v.  Hazzard, 
41  Ind.  116,  the  assured  had  failed  to  pay  the  premiums,  and  had 
notified  the  insurers  that  he  should  not  keep  up  the  policy.  He 
afterward  assigned  it  for  $20,  the  insurer  assenting  and  receiving 
the  premiums.  The  assignment  was  held  void,  the  court  saying 
that  such  policies  are  assignable,  but  not  "to  one  who  buys  them 
merely  as  matter  of  speculation  without  interest  in  the  life  of  the 
assured."  Neither  of  these  cases  decides,  whatever  dicta  may  have 
accompanied  the  decision,  that  all  assignments  without  interest  are 
illegal.  The  case  last  cited  is  affirmed  in  the  case  of  Franklin  Ins.  Co. 
v.  Sefton,  53  Ind.  380,  in  which  CHIEF  JUSTICE  WORDEN,  quoting 
from  the  opinion  of  the  court  in  Hutson  v.  Merrifield,  51  Ind.  24 — 
that  "the  party  holding  and  owning  such  a  policy,  whether  on  the 
life  of  another  or  on  his  own  life,  has  a  valuable  interest  in  it,  which 
he  may  assign,  either  absolutely  or  by  way  of  security,  and  it  is 
assignable  like  any  other  chose  in  action" — says  that  it  is  not  stated 
that  it  is  assignable  to  a  person  incapable  of  receiving  an  assignment, 
and  adds,  "It  may  be  added  that  where  the  policyholder  dies  before 
the  death  of  the  party  whose  life  is  insured,  perhaps  the  administrator 
of  the  holder  could,  for  the  purpose  of  converting  the  assets  into 
money  and  settling  up  the  estate  in  due  course  of  law,  sell  the  policy 
to  anyone  who  might  choose  to  become  the  purchaser." 

We  think  that  the  second  ruling  was  correct,  and  that  the  fact 
that  the  assignee  had  no  insurable  interest  in  the  life  does  not  avoid 
the  assignment.  It  is  one  circumstance  to  be  regarded  in  determining 
the  character  of  the  transaction,  but  it  is  not  conclusive  of  its  illegality. 

Decree  for  the  defendant  Allen. 

QUESTIONS 

i.  X  effects  insurance  on  the  life  of  her  husband.  After  his  death  and 
seasonable  notice  of  it  to  the  company,  she  assigns  the  policy  to  P. 
P  sues  the  insurer  for  the  loss.  What  decision  ? 


76  LAW  AND  BUSINESS 

2.  X  effects  insurance  on  his  life  and  with  the  consent  of  the  company 
makes  a  gratuitous  assignment  of  the  policy  to  P.    P  pays  the  premiums 
on  the  policy  during  X's  life  and  after  his  death  sues  for  the  loss.    What 
decision  ? 

3.  X  is  the  holder  of  a  policy  of  insurance  on  his  life  which  provides  that  it 
is  not  assignable  without  notice  to  the  company.    X  assigns  the  policy  to 
P.    No  notice  is  given  to  the  company  of  the  assignment.     P  sues  on 
the  policy  after  the  death  of  X.    What  decision  ? 

4.  X  effects  insurance  on  his  life  in  the  sum  of  $1,000.    After  paying  the 
premiums  of  the  insurance  for  two  years,  he  assigns  it  to  P,  with  the 
assent  of  the  insurer.    After  X's  death,  P  sues  for  the  loss.    The  com- 
pany contends  that  the  policy  is  void  because  X,  before  making  the 
assignment  to  P,  had  violated  a  condition  in  the  policy.    What  decision  ? 

5.  P,  a  person  of  sporting  tendencies,  makes  this  proposition  to  X:   "You 
are  not  going  to  live  long  and  we  can  both  make  money  on  your  life. 
Take  out  insurance  on  your  life  for  $10,000  and  I  will  give  you  $1,000 
for  the  policy  when  it  is  issued."    In  pursuance  of  this  agreement,  X 
effected  the  insurance  on  his  life  and  made  the  assignment  to  P  with  the 
consent  of  the  company.    After  the  death  of  X,  P  sues  on  the  policy. 
The  company  ^  contends  that  the  policy  is  void.    What  decision? 

6.  What  is  the  difference  between  the  assignability  of  fire  insurance  con- 
tract and  the  assignability  of  a  life  insurance  contract?    Is  there  any 
justification  for  the  difference? 

II)    Beneficiaries 

GROSVENOR  v.  ATLANTIC  FIRE  INSURANCE  COMPANY 
17  New  York  Reports  391  (1858) 

HARRIS,  J.  The  contract  of  insurance  is  a  contract  of  indemnity. 
To  sustain  an  action  upon  such  a  contract,  it  must  appear  that  the 
party  insured  has  sustained  a  loss.  This  involves  the  necessity  of  an 
insurable  interest  at  the  time  of  the  alleged  loss.  Without  such 
interest  the  party  insured  cannot  be  damnified. 

In  this  case,  the  contract  was  between  the  defendants  and 
McCarty.  The  agreement  was  to  insure  Eugene  W.  McCarty  against 
loss  or  damage  by  fire,  to  the  amount  of  $7,000,  on  his  three-story 
brick  dwelling-house.  But  after  the  contract  was  made,  and  before 
the  alleged  loss,  McCarty  had  sold  and  conveyed  the  property  insured. 
At  the  time  of-  the  fire  he  had  no  insurable  interest;  of  course,  he  has 
no  claim  for  indemnity.  No  action,  therefore,  could  be  maintained 
upon  the  policy  by  McCarty. 

But  at  the  time  the  insurance  was  effected,  the  plaintiff  in  this 
action,  Grosvenor,  was  the  holder  of  a  mortgage  upon  the  premises 


DEVICES  FOR  SHIFTING  RISKS  77 

insured.  As  such  mortgagee,  he,  too,  had  an  insurable  interest. 
The  extent  of  that  interest  was  the  amount  of  his  debt.  To  that 
extent  he  might  have  contracted  with  the  defendants  to  indemnify 
him  against  loss  by  fire.  The  payment  of  his  debt  would  as  completely 
terminate  the  contract  to  insure  as  would  the  alienation  of  the 
property,  when  the  contract  is  made  with  the  owner. 

The  important  inquiry  in  this  case,  is,  to  which  of  these  classes 
does  the  contract  in  question  belong  ?  The  action  is  brought  by  the 
plaintiff  as  mortgagee.  The  contract  was  made  with  McCarty,  the 
mortgagor.  But  the  policy  provides  that  in  case  of  loss,  such  loss 
should  be  payable  to  the  plaintiff.  What  is  the  legal  effect  of  this 
provision  ?  Without  it  the  plaintiff  could  have  had  no  claim  against 
the  defendants  for  indemnity.  Is  this  provision  to  be  regarded  as 
an  appointment  of  the  plaintiff  to  receive  any  money  which  might 
become  due  from  the  insurers  by  reason  of  any  loss  sustained  by  the 
mortgagor,  or  has  it  the  effect  to  render  the  policy,  which  would 
otherwise  be  a  contract  to  indemnify  the  mortgagor  against  a  loss, 
a  contract  to  indemnify  the  mortgagee?  A  determination  of  this 
question  will  also  determine  the  rights  of  the  parties  to  this  action. 

Were  it  not  for  one  or  two  decisions  in  this  state  bearing  upon  the 
question,  I  should  have  little  difficulty  in  pronouncing  in  favor  of  the 
former  of  these  propositions.  It  seems  to  me  to  be  very  clear  that  it 
was  the  intention  of  all  the  parties  that  the  interest  of  the  mortgagor, 
and  not  that  of  the  mortgagee,  should  be  insured.  It  is  stated  in  the 
policy  that  the  property  insured  is  the  property  of  McCarty,  and 
that  he  is  the  person  insured.  McCarty  paid  the  premium.  He  made 
the  contract.  His  interest  as  owner,  and  not  that  of  the  plaintiff 
as  mortgagee,  was  the  subject  of  the  insurance.  The  plaintiff  was 
merely  the  appointee  of  the  party  insured  to  receive  the  money  which 
might  become  due  him  from  the  insurers  upon  the  contract.  The 
provision  in  the  policy  in  this  respect  had  no  more  effect  upon  the 
contract  itself  than  it  would  if  it  had  been  provided  that  the  loss  for 
which  the  insurers  should  become  liable  should  be  deposited  in  a 
specified  bank  to  the  credit  of  the  party  insured. 

Suppose  that  the  plaintiff,  although  described  in  the  policy  as  a 
mortgagee,  had,  in  fact,  held  no  mortgage,  could  it  be  pretended  that 
the  defendants  might  have  avoided  the  policy  on  the  ground  that  the 
plaintiff  had  no  insurable  interest?  Or,  suppose  again,  that  after 
the  contract  had  been  made,  the  mortgage  had  been  paid,  could  it 
be  claimed  that  the  contract  to  insure  had  also  ceased  ?  I  presume 


78  LAW  AND  BUSINESS 

none  will  deny  that,  in  either  case,  the  contract  would  have  continued 
in  force  for  the  benefit  of  the  owner  of  the  property  insured.  If  so, 
it  must  have  been  because  the  interest  of  the  mortgagor,  and  not  that 
of  the  mortgagee,  was  the  thing  insured.  I  agree  with  the 
court  below  that  "there  is  nothing  in  the  language  of  the  policy 
on  which  the  court  can  adjudge  that  in  legal  effect  it  is  a  contract 
insuring  the  interest  of  the  mortgagee  as  such,  except  in  the  provision 
which  declares  that  the  loss,  if  any,  which  occurs  under  the  contract 
insuring  the  mortgagor's  interest,  shall  be  payable  to  the  mortgagee. 
That  provision  merely  designates  a  person  .to  whom  such  loss  is  to  be 
paid,  and  shows  that  he  is  a  person  who  may  have  an  interest  in  its 
being  paid." 

The  undertaking  to  pay  the  plaintiff  was  an  undertaking  collateral 
to  and  dependent  upon  the  principal  undertaking  to  insure  the 
mortgagor.  The  effect  of  it  was,  that  the  defendants  agreed  that 
whenever  any  money  should  become  due  to  the  mortgagor  upon  the 
contract  of  insurance,  they  would,  instead  of  paying  it  to  the 
mortgagor  himself,  pay  it  to  the  plaintiff.  The  mortgagor  must 
sustain  a  loss  for  which  the  insurers  were  liable,  before  the  party 
appointed  to  receive  the  money  would  have  a  right  to  claim  it.  It 
is  the  damage  sustained  by  the  party  insured,  and  not  by  the  party 
appointed  to  receive  payment,  that  is  recoverable  from  the  insurers. 
(Macomber  v.  The  Cambridge  Mutual  Fire  Ins.  Co.,  8  Cush.  133.) 
The  insurance  being  upon  the  interest  of  the  mortgagor,  and  he  having 
parted  with  that  interest  before  the  fire,  no  loss  was  sustained  by 
him,  and,  of  course,  none  was  recoverable  by  his  assignee  or  appointee. 
The  right  of  such  a  party  being  wholly  derivative,  cannot  exceed  the 
right  of  the  party  under  whom  he  claims.  (Carpenter  v.  The  Providence 
Washington  Ins.  Co.,  16  Peters,  495;  Foster  v.  The  Equitable  Fire  Ins. 
Co.,  2  Gray,  216.) 

I  agree  with  the  learned  judges  who  delivered  opinions  upon  the 
decision  of  this  case  in  the  court  below,  that  there  is  no  just  ground 
for  discrimination  between  this  case  and  that  of  an  assignment  of 
the  policy  to  a  mortgagee  to  be  held  by  him  as  collateral  security 
for  his  debt,  with  the  consent  of  the  insurer.  In  either  case  the 
insurance  is  upon  the  interest  of  the  mortgagor.  The  terms  and 
conditions  upon  which  indemnity  may  be  claimed  are  agreed  upon, 
and  then  the  original  parties  further  agree  that  when,  by  the  terms 
and  conditions  of  the  contract,  the  insurers  shall  become  liable  by  reason 
of  a  loss  sustained  by  the  party  insured,  the  money  shall  be  paid, 


DEVICES  FOR  SHIFTING  RISKS  79 

not  to  the  party  who  has  sustained  the  loss,  but  to  his  appointee  or 
assignee  for  his  benefit.  Such  an  appointment  or  assignment  ought 
not  to  be  construed  so  as  to  vary,  in  any  respect,  the  liabilities  of  the 
insurers  upon  their  original  contract.  It  is  certainly  true,  as  was 
said  by  Mr.  JUSTICE  WOODRUFF,  that  "when  applied  to  other  agree- 
ments for  the  payment  of  money,  an  assignment  does  no  more  than 
direct  to  whom  it  shall  be  paid  when  it  shall  become  due." 

Upon  the  merits  of  the  question,  I  have  already  sufficiently 
expressed  the  convictions  of  my  own  judgment.  The  defendants 
contracted  with  McCarty,  and  not  the  plaintiff.  They  agreed,  upon 
the  performance  of  certain  conditions,  to  pay  for  him  to  the  plaintiff 
certain  money.  Some  of  these  conditions  were  positive  in  their 
character;  others  negative.  Certain  things  were  to  be  done  by  the 
assured,  and  others  things  were  not  to  be  done.  If  all  these  conditions 
were  performed,  then  if  a  loss  occurred,  the  defendants  agreed  to 
indemnify  him  against  that  loss,  to  the  extent  specified  in  the  policy, 
and  he  appointed  the  plaintiff,  his  creditor,  to  receive  from  the 
defendants  the  amount  for  which  they  were  thus  contingently  liable. 
The  terms  of  this  contract  have  never  been  waived,  relaxed,  or 
modified.  The  defendants  have  shown  an  express  violation  of  one 
or  more  of  the  conditions  upon  which  their  liability  was  to  depend. 
And  yet  it  has  been  adjudged,  although  it  is  evident  that  it  has  been 
done  with  reluctance  and  against  the  better  judgment  of  the  court 
making  the  decision,  that  the  proof  of  these  violations  constituted 
no  defence  to  the  action. 

The  judgment  should  be  reversed  and  a  new  trial  granted,  with 
costs  to  abide  the  event. 


QUESTIONS 

1.  What  was  the  issue  under  consideration  in  this  case?    How  was  it 
decided?    What  rule  of  law  can  be  deduced  from  the  decision? 

2.  X  insures  a  building  with  the  D  Company  for  $5,000  and  indorses  on 
the  policy,  "Pay  the  loss,  if  any,  to  P,  mortgagee."    A  loss  occurs  and  P 
sues  for  it.    What  decision  ? 

3.  In  the  foregoing  case,  X  sells  the  property,  subject  to  the  mortgage,  to  Y. 
What  decision  in  an  action  by  P  for  a  loss  under  the  policy  ? 

4.  X  fails  to  pay  the  premiums  when  they  fall  due.    P  sues  for  a  loss  under 
the  policy.    What  decision  ? 

5.  X  keeps  gasoline  on  the  premises,  contrary  to  a  condition  in  the  policy. 
What  decision  in  an  action  by  P  on  the  policy  ? 


8o  LAW  AND  BUSINESS 

6.  D  insures  the  house  of  X  and  agrees  to  pay  the  loss,  if  any,  to  P,  the 
mortgagee,  as  his  interest  may  appear.    The  house  burns  and  P  brings 
an  action  on  the  policy.    What  decision  ? 

7.  In  the  foregoing  case,  D  pays  the  whole  loss,  without  P's  consent,  to  X. 
What  are  P's  rights,  if  any,  against  the  insurance  company  ? 


LEMON  v.  PHOENIX  MUTUAL  LIFE  INSURANCE  COMPANY 

38  Connecticut  Reports  294  (1871) 

SEYMOUR,  J.  In  January,  1868,  the  respondent  issued  a  policy 
on  the  life  of  George  C.  Peterson,  for  $3,000.  This  was  in  the  usual 
form  of  an  endowment  policy,  and  no  question  arises  upon  it.  In 
November,  1868,  this  policy  was  surrendered  and  canceled,  and  at 
the  request  of  the  assured  a  new  policy  issued  in  its  place,  like  the 
former  in  every  respect  except  that  it  was  payable  to  the  petitioner, 
with  whom  the  assured  was  under  an  engagement  of  marriage.  The 
leading  question  in  this  case  is  whether  the  petitioner  became  the 
owner  of  this  second  policy. 

It  is  not  claimed  that  the  mere  fact  of  making  the  policy  payable 
to  Miss  Lemon,  without  more,  vested  in  her  a  complete  title.  It  is 
conceded  that  so  long  as  Mr.  Peterson  retained  it  in  his  own  possession, 
he  might  control  it  as  his  own.  On  the  other  hand,  it  is  not  doubted 
that,  if  Mr.  Peterson  delivered  it  to  Miss  Lemon  as  a  gift  to  her,  such 
delivery  would  vest  in  her  a  complete  title.  The  difficulty  in  the 
case  is  in  determining  whether,  on  the  facts  found,  the  policy  may 
properly  be  regarded  as  having  been  in  legal  effect  delivered  to  her. 
This  is  so  much  a  mere  matter  of  fact  that  the  committee  should 
have  distinctly  found  it  the  one  way  or  the  other,  but  instead  of  a 
direct  finding,  we  have  a  special  statement  of  facts  bearing  on  the 
question,  and  it  is  left  to  the  court  to  decide  the  ultimate  facts,  by 
inference  from  this  special  statement.  Neither  the  petitioner  nor 
the  respondent  saw  fit  to  remonstrate  against  the  acceptance  of  the 
report  of  the  committee.  On  the  contrary  the  report  is  accepted 
without  objection  from  either  party;  and  we  must  dispose  of  the 
question  as  best  we  may  with  the  light  we  have. 

First,  the^fact  that  Mr.  Peterson  caused  the  policy  to  be  made 
payable  to  Miss  Lemon,  indicates  a  settled  purpose  in  his  mind 
that  she  should  have  the  benefit  of  it;  and  his  acts  immediately 
after  will  naturally  be  construed  as  intended  to  carry  out  such  purpose. 
Second,  when  therefore  the  policy  is  by  Mr.  Peterson's  order  sent 


DEVICES  FOR  SHIFTING  RISKS  8l 

to  Miss  Lemon's  brother,  we  naturally  regard  it  as  sent  to  him  for  her, 
as  depositary  for  her,  and  for  her  benefit,  rather  than  as  depositary 
for  Mr.  Peterson  himself.  Third,  it  appears  from  the  committee's 
report  that  the  intended  change  in  the  policy  for  her  benefit  was 
communicated  to  her  before  it  was  made,  and  that  it  was  upon  her 
suggestion  that  the  policy  was  placed  in  the  hands  of  her  brother. 
Fourth,  after  the  policy  was  changed  and  made  payable  to  Miss 
Lemon,  and  sent  to  her  brother,  she  was  informed  by  Mr.  Peterson 
of  what  he  had  done.  Upon  these  considerations,  in  view  of  all  the 
facts  in  the  case,  we  think  we  must  find  that  there  was  an  executed 
gift  of  the  policy  to  Miss  Lemon,  and  that  the  delivery  to  her  brother 
was  as  depositary  for  her. 

In  December,  1868,  Mr.  Peterson  changed  his  mind  in  regard  to 
this  policy,  and  obtained  possession  of  it  from  Mr.  Lemon,  by  what 
means  does  not  distinctly  appear;  but  the  committee's  report  gives 
no  countenance  to  the  idea  that  it  was  by  fraudulent  means,  as 
charged  in  the  bill.  It  does,  however,  appear  that  the  possession 
was  obtained  without  the  petitioner's  consent,  and  also  that  she  had 
no  knowledge  of  the  second  change  of  the  policy  now  to  be  spoken  of, 
until  after  Mr.  Peterson's  death. 

In  January,  1869,  Mr.  Peterson  having,  as  before  stated,  obtained 
possession  of  policy  number  two,  caused  it  to  be  surrendered,  and  a 
new  one,  number  three,  to  be  issued  in  its  place,  payable  to  Peter 
A.  Peterson,  a  brother  of  George.  George  went  south- for  his  health 
which  was  failing,  starting  November  30,  1868,  and  he  was  not  able 
to  do  business  after  that  time  till  his  death,  October  19,  1869.  His 
health  was  not  such  as  to  enable  him  to  pass  the  necessary  medical 
examination  for  a  new  policy  in  November,  1868,  or  afterward. 

Upon  these  facts  it  is  clear  that  the  consideration  for  policy 
number  three,  was  the  surrender  of  policy  number  two.  Mr.  Peter- 
son's health  was  such  that  number  three  would  not  have  been  issued, 
if  the  company  had  not  been  bound  by  number  two.  And  in  as  much 
as  policy  number  two  belonged  to  the  petitioner,  it  was  her  property 
that,  without  her  consent,  was  used  to  procure  number  three.  She 
is  therefore  equitably  entitled  to  the  benefit  of  this  policy. 

Mr.  Peterson's  money  however,  to  the  extent  of  the  premium 
paid  in  January,  1869,  is  represented  in  policy  number  three;  and 
to  that  extent  Miss  Lemon  has  no  interest;  and  from  the  $3,000  due 
on  the  policy  the  amount  of  that  premium  and  interest  on  it  should 
be  deducted,  and  the  balance  paid  to  the  petitioner. 


82  LAW  AND  BUSINESS 

A  question  was  made  before  us  that  Miss  Lemon  had  not  an 
insurable  interest  in  Mr.  Peterson's  life.  If  she  had  undertaken  to 
obtain,  and  had  herself  obtained  an  insurance  on  his  life,  that  question 
might  have  arisen.  But  surely  Mr.  Peterson  had  an  insurable  interest 
in  his  own  life,  and  he  obtained  the  insurance  upon  it;  and  we  know 
of  no  law  to  prevent  him  from  making  the  policy  payable  in  case  of 
his  death  to  the  person  to  whom  he  was  affianced;  and  if  such  policy 
is  delivered  as  a  gift  to  the  party  to  whom  payable,  we  know  no  law 
to  prevent  such  gift  from  being  effectual.  In  Rauls  v.  American  Life 
Ins.  Co.,  27  N.Y.  282,  JUDGE  WRIGHT  says,  "If  the  contract  is 
with  the  party  whose  life  is  insured,  he  may  have  the  loss  payable  to 
his  own  representatives,  or  to  his  assignee  or  appointee."  Besides, 
the  company  treated  policy  number  two  as  valid;  it  appears  that 
policy  number  three  was  issued  in  consideration  of  the  surrender  of 
number  two,  as  before  stated,  and  the  question  now  to  be  decided 
is  not  on  the  validity  of  number  two,  but  whether  Miss  Lemon  has 
an  equitable  interest  in  number  three. 

We  advise  the  Superior  Court  to  pass  a  decree  in  favor  of  the 
petitioner,  to  the  extent  and  in  the  manner  specified  above.  We 
ought  however  to  say  that  it  has  not  escaped  our  attention  that  the 
bill  is  not  in  its  allegations  precisely  adapted  to  the  facts  as  found  by 
the  committee,  nor  precisely  to  the  grounds  upon  which  relief  is 
granted.  But  no  point  was  made  by  the  respondent  on  this  account, 
and  if  any  question  had  been  made,  we  probably  should  have  advised, 
as  has  been  done  in  similar  cases,  that  the  bill  be  amended  to  corres- 
pond with  the  case  as  shown  by  the  report  of  the  committee. 

In  this  opinion  the  other  judges  concurred;  except  CARPENTER,  J., 
who  dissented. 

QUESTIONS 

1.  X  insures  his  life  with  the  D  Company  and  designates  P  in  the  policy 
as  beneficiary.     P  brings  an  action  for  the  loss  under  the  policy.    The 
company  relies  on  the  following  defenses:   (a)  that  P  furnished  no  con- 
sideration for  the  company's  promise;    (b)  that  the  policy  was  never 
delivered  to  P;   (c)  that  P  had  no  insurable  interest  in  the  life  of  X; 
(d)  that  X  practiced  fraud  on  it  in  securing  the  policy;    (e)  that  X 
failed  to  keep  up  the  premiums  on  the  policy  during  his  life.    Pass 
judgment  on  each  defense. 

2.  X  secures  an  insurance  policy  on  his  life  in  which  P  is  named  as  bene- 
ficiary.   At  X's  request  and  without  P's  knowledge  or  consent,  the 
company  makes  B  the  beneficiary  of  the  policy.    After  X's  death;  (a)  P 


DEVICES  FOR  SHIFTING  RISKS  83 

sues  the  company  for  the  loss  under  the  policy;   (£)  B  sues  for  the  loss. 
What  decision  in  each  case  ? 

3.  The  D  Company  issues  a  policy  of  insurance  on  the  life  of  X  in  which  P 
is  designated  as  the  beneficiary.    P  poisons  X  and  brings  an  action  on 
the  policy  for  the  loss  under  it.    What  decision  ?    If  P  cannot  recover  the 
loss,  is  anyone  in  a  position  to  recover  it  ? 

4.  X  takes  out  a  policy  of  straight  life  insurance  on  his  life  and  names  W, 
his  wife,  as  beneficiary.    W  dies  and  then  X  dies.    The  personal  repre- 
sentative of  each  party  is  claiming  the  proceeds  of  the  policy.    To  which 
of  them  should  it  be  given  ? 

5.  Would  your  answer  have  been  the  same  in  the  foregoing  case,  if  the 
insurance  had  been  endowment  instead  of  straight  life  ? 

6.  X  insures  his  life  in  favor  of  W,  his  wife,  and  delivers  to  her  the  policy. 
He  forges  her  signature  to  a  letter,  purporting  to  authorize  the  company 
to  surrender  the  policy.    The  company,  innocently  relying  on  the  letter, 
canceled  the  policy  and  sent  its  cash  surrender  value  to  X.    After  the 
death  of  X,  W  sues  on  the  policy.    What  decision  ? 

7.  X  effects  insurance  on  his  life  and  designates  P  as  beneficiary.    In  the 
policy,  X  reserves  the  right  to  change  the  beneficiary  at  will.     What  is 
the  nature  of  P's  interest  in  the  policy? 


PULLIS  v.  ROBISON 
73  Missouri  Reports  201  (1880) 

NORTON,  J.  This  is  a  proceeding  in  the  nature  of  a  creditor's 
bill,  instituted  by  certain  creditors  of  James  P.  Robison,  deceased, 
whose  claims  had  been  allowed  by  the  probate  court  against  his 
estate,  to  subject  to  the  payment  of  said  debts  the  proceeds  of  certain 
policies  of  insurance  taken  out  on  the  life  of  said  Robison,  and  made 
payable  to  his  wife.  The  creditors  suing  are  three  in  number,  and 
each  having  brought  a  separate  action,  the  three  suits  were  con- 
solidated and  tried  together.  Three  of  the  policies,  the  proceeds  of 
which  constitute  the  subject-matter  of  controversy,  were  issued  by 
the  Mutual  Benefit  Life  Insurance  Company,  each  of  them  being 
for  $5,000,  and  dated,  respectively,  February  26,  1867,  February  21, 
1868,  and  May  12,  1870.  The  amount  of  annual  premiums  was  as 
follows:  $283  on  the  one  dates  in  1867,  $263  on  the  one  dated  in 
1868,  and  $289  on  the  one  issued  in  1870.  The  plaintiffs  claim  and 
allege  in  their  bill  that  Robison  was  in  embarrassed  circumstances, 
and  at  the  time  the  premiums  were  paid  he  was  insolvent,  and  that 
said  policies  were  donated  to  his  wife,  and  were  procured  for  the 


84  LAW  AND  BUSINESS 

purpose  of  hindering,  delaying,  and  defrauding  creditors.  Defend- 
ant, Mrs.  Henrietta  Robison,  to  whom  said  policies  were  made 
payable,  denies  all  the  allegations  of  the  bill,  and  asserts  her  right  to 
the  proceeds  of  the  same. 

Upon  the  trial  of  the  issues  thus  tendered,  the  court  found  that 
said  Robison  was  solvent  at  the  time  said  policies  were  taken  out, 
and  remained  solvent  till  about  the  year  1876;  that  the  payment  of 
the  two  last  premiums  on  two  of  said  policies  amounting  to  $342.05, 
dated  respectively  in  1867  and  1868,  which  payment  occurred  in 
1876,  was  made  by  Robison  while  he  was  insolvent,  and  that  all 
payments  of  premiums  anterior  to  1876  were  made  by  him  when  he 
was  solvent.  Upon  this  finding  the  court  decreed  that  Mrs.  Robison 
was  entitled  to  the  proceeds  of  the  policies,  less  the  amount  of  premi- 
ums paid  by  Robison  when  insolvent,  with  the  interest  thereon, 
and  also  decreed  that  Mr.  Pullis,  the  plaintiff  who  first  brought  suit, 
was  entitled  to  the  whole  amount  of  the  premium  paid  in  1876  with 
its  interest.  From  this  judgment  plaintiffs  appealed  to  the  St.  Louis 
Court  of  Appeals,  where  the  judgment  was  affirmed,  and  from  this 
judgment  they  appealed  to  this  court. 

It  is  insisted,  by  counsel,  that  inasmuch  as  the  payment  made 
in  1876  kept  the  policies  on  foot  and  gave  them  vitality,  the  whole 
amount  of  the  insurance  money,  or  so  much  thereof  as  will  be  sufficient 
to  satisfy  their  debts,  should  be  so  applied.  We  have  not  been  cited 
to,  nor  have  we  been  able  to  find  any  authority  that  goes  to  that 
extent,  nor  are  we  acquainted  with  any  equitable  principle  on  which 
the  claim  can  be  founded.  How  the  insurance  money,  under  the 
fact  and  circumstances  of  this  case,  should  be  apportioned,  presents 
a  question  of  some  difficulty,  especially  so,  as  the  authorities  we  have 
been  able  to  examine  are  conflicting  in  the  rules  laid  down.  The 
case  of  Landrum  v.  Knowles,  22  NJ.  Eq.  594,  goes  farther  in  support 
of  plaintiffs'  position  than  any  which  has  fallen  under  our  observation, 
and  it  falls  far  short  of  what  is  contended  for  by  them.  In  that  case 
the  wife  insured  the  life  of  her  husband  for  the  benefit  of  her  children, 
and  after  paying  the  annual  premiums  for  about  ten  years  assigned 
the  policy,  in  conjunction  with  her  husband,  to  one  of  the  husband's 
creditors  in  payment  of  the  debt.  After  said  assignment  the  wife 
ceased  to  pay  the  premiums,  but  they  were  paid  for  about  nine 
years  by  the  creditors.  Upon  the  death  of  her  husband  the  insurance 
money  was  claimed  by  the  children  on  the  one  hand,  and  the  assignee 


DEVICES  FOR  SHIFTING  RISKS  85 

on  the  other,  and  the  chancellor  decided  that  the  children  were 
entitled  to  the  cash  value  of  the  policy  at  the  time  it  ceased  to  be  kept 
alive  by  the  mother,  and  that  the  residue  of  the  money  due  on  the 
policy  should  be  paid  over  to  the  assignee. 

On  the  other  hand,  in  the  case  of  Trough's  Estate,  8  Phila.  215, 
where  Trough,  having  taken  out  a  policy  on  his  life,  assigned  the 
same,  while  solvent,  to  a  trustee  for  the  benefit  of  his  children,  and 
becoming  insolvent  thereafter,  still  continued  to  pay  the  premiums, 
in  a  contest  for  the  insurance  money  between  the  children  and  Trough's 
creditors,  the  rule  laid  down  that  the  only  claim  the  creditors  could 
sustain  would  be  the  amount  of  the  premiums  paid  by  Trough  to 
keep  the  policy  alive  after  he  became  insolvent. 

The  object  of  such  rules  being  to  do  exact  justice  between  the 
contending  parties  and  to  distribute  the  fund  according  to  their 
rights,  it  appears  to  us  that  neither  of  the  rules  above  accomplishes 
the  object;  and  inasmuch  as  the  insurance  money  in  contest  in  this 
case  was  the  product  of  all  the  premiums  paid,  we  think  a  just  dis- 
tribution of  it  would  be  obtained  by  declaring  that  Mrs.  Robison 
should  be  decreed  to  have  so  much  of  the  fund  as  was  produced  by  the 
payment  of  the  premiums  by  her  husband  when  solvent,  and  plaintiffs 
so  much  as  paid  by  Robison  when  insolvent  contributed  to  produce; 
that  is,  that  plaintiffs  are  entitled  to  recover  the  same  proportional 
part  of  the  whole  insurance  money  that  the  premiums  paid  by  Robison 
when  insolvent  bear  to  the  premiums  paid  by  him  when  solvent. 
Giving  effect  to  this  rule  in  the  disposition  of  the  case,  and  accepting 
the  fact  found  by  the  court  that  Robison,  after  his  insolvency,  paid 
$342.05  as  being  correctly  found,  and  the  further  fact,  as  shown  by 
the  record,  that  Robinson  had  paid  on  two  of  said  policies  during  his 
solvency  premiums  amounting  to  $4,650,  plaintiffs  would  be  entitled 
to  recover  the  sum  of  $686.84,  and  Mrs.  Robison  the  residue. 

As  plaintiff  Pullis  in  the  race  of  diligence  was  the  first  to  file  his 
bill,  asking  an  appropriation  of  the  fund  to  the  payment  of  his  demand, 
he  has  obtained  a  priority  over  the  other  creditors,  and  the  said  sum 
of  $686.84  should  be  applied  on  his  debt.  George  v.  Williamson, 
26  Mo.  193.  The  judgment  will  be  reversed  and  cause  remanded, 
with  directions  to  the  circuit  court  to  enter  up  a  decree  in  conformity 
with  this  opinion,  directing  the  receiver  in  whose  hands  the  fund  has 
been  placed,  to  pay  first  the  costs  of  the  suit,  next,  the  siim  of  $686.84 
to  plaintiff  Pullis,  and  next,  the  residue  to  defendant,  Mrs.  Robison. 


86  LAW  AND  BUSINESS 

QUESTIONS 

1.  On  what  theory  were  the  creditors  permitted  to  share  in  the  proceeds  of 
the  insurance  on  the  life  of  the  deceased  ? 

2.  X  effects  insurance  on  his  life  in  the  sum  of  $5,000  payable  to  his  estate. 
He  dies  insolvent,  leaving  a  wife  and  two  minor  children.    X's  creditors 
are  claiming  the  whole  amount  of  insurance  in  satisfaction  of  their  debts. 
What  decision  ? 

3.  In  the  foregoing  case,  the  insurance  is  payable  to  W,  his  wife.    X  dies 
insolvent.    P,  by  whom  X  was  employed  during  his  life,  claims  the  pro- 
ceeds of  the  policy  on  the  ground  that  the  first  and  all  subsequent  premi- 
ums were  paid  with  money  embezzled  from  him.    What  decision  ? 

4.  X  effects  insurance  on  his  life  in  favor  of  W.    In  the  policy,  X  reserves 
the  right  to  change  the  beneficiary  at  will.    X  dies,  leaving  insufficient 
property  to  meet  all  his  debts.    What  are  the  rights  of  his  creditors 
with  respect  to  the  proceeds  of  the  insurance  ? 

5.  P  makes  a  loan  of  $2,000  to  X  and  insures  X's  life  by  way  of  security  in  the 
sum  of  $2,500.     A  year  later,  X  discharges  the  debt.     Six  months  later, 
X  dies.    Who  is  entitled  to  the  proceeds  of  the  policy  ? 

6.  X  insures  his  life  in  the  sum  of  $5,000.     He  assigns  the  policy  to  P  to 
secure  a  debt  of  $1,000.    X  dies,  without  having  paid  the  debt.    Who  is 
entitled  to  the  proceeds  of  the  policy  ? 

7.  In  the  foregoing  case,  X,  having  paid  the  premiums  on  the  policy  for  two 
years  sells  and  assigns  the  policy  to  P,  a  stranger,  for  $250.    P  pays  the 
premiums  on  the  policy  until  X's  death,  two  years  after  the  assignment. 
Who  is  entitled  to  the  proceeds  of  the  policy  ? 


11.      AS  TO  OBLIGATION 

I)     The  Risk  Insured  Against 
JOHNSON  ».  BERKSHIRE  FIRE  INSURANCE  COMPANY 

4  Allen's  Massachusetts  Reports  388  (1862) 

Contract  upon  a  policy  of  insurance  upon  the  plaintiff's  barn  and 
grain  therein,  issued  by  the  defendants.  A  trial  by  jury  was  waived 
in  the  superior  court,  and  the  case  was  heard  before  AMES,  J.,  who 
found  the  following  facts: 

In  the  afternoon  of  a  hot  day  in  a  dry  season  in  August  1859, 
during  the  time  covered  by  the  policy,  the  plaintiff  and  his  son  were 
unloading  hay  from  a  wagon  and  placing  it  in  a  shed  adjoining  the 
barn,  and  while  so  engaged  were  annoyed  by  bees  whose  nest  was 
in  a  hollow  place  under  the  door  at  which  they  were  pitching  in  the 
hay;  and  the  plaintiff,  finding  that  no  hot  water  could  readily  be  had, 


DEVICES  FOR  SHIFTING  RISKS  87 

undertook  to  smoke  them  out  by  thrusting  a  wisp  of  straw  into  their 
hole  and  lighting  it  with  a  match.  A  fresh  breeze  was  blowing  at  the 
time;  the  building  was  very  old,  and  covered  on  the  outside  with 
white  wood  boards;  the  barn  adjoining  was  full  of  hay,  and  some- 
hay  was  stored  in  the  loft  of  the  shed.  After  withdrawing  the  wisp 
of  straw,  and  while  attempting  to  extinguish  it,  the  fire  spread  with 
great  rapidity  on  the  outside  of  the  shed,  and  destroyed  the  property. 
It  was  admitted  that  there  was  no  fraudulent  intent  on  the  part  of 
the  plaintiff.  Upon  these  facts,  the  judge  found  that  there  had  been 
a  want  of  ordinary  care,  judgment,  and  discretion  on  the  part  of  the 
plaintiff;  that  this  default  was  the  immediate  and  proximate  cause 
of  the  fire;  and  that,  although  he  acted  in  good  faith,  and  the  negli- 
gence and  default  on  his  part  did  not  amount  to  recklessness  and  wil- 
ful misconduct,  yet  under  the  circumstances  he  was  not  entitled  to 
recover. 

The  plaintiff  alleged  exceptions;  and  it  was  agreed  that  if  the 
exceptions  should  be  sustained,  judgment  should  be  entered  for  the 
plaintiff,  for  the  amount  of  the  policy. 

MERRICK,  J.  The  defendants  contend  that  the  carelessness  and 
negligence  proved  at  the  trial  whereby  the  fire  was  caused,  by  which 
the  barn  and  other  property  insured  were  destroyed,  constitute  a 
valid  defence  to  this  action.  It  is  admitted  that  there  was  no  fraudu- 
lent intent  on  the  part  of  the  plaintiff  in  the  commission  of  the  acts 
from  which  the  fire  immediately  resulted.  But  it  was  found  as  a 
fact  by  the  court,  the  parties  having  waived  a  trial  by  jury,  that 
there  had  been  an  omission  to  exercise  ordinary  care,  discretion, 
and  judgment  on  his  part;  and  it  was  thereupon  determined  that, 
although  he  had  acted  in  good  faith,  and  his  negligence  and  default 
did  not  amount  to  recklessness  or  wilful  misconduct,  he  was  not 
entitled  to  recover  indemnity  in  this  action  for  his  loss. 

This  determination  was  erroneous.  It  is  said  to  have  been 
formerly  doubted  whether  in  marine  insurances  underwriters  were 
liable  for  losses  by  fire  occasioned  by  the  negligence  or  mismanage- 
ment of  the  master  or  mariners  at  sea,  but  that  now  it  is  the  better 
and  established  doctrine  that  they  are  liable  where  the  acts  are  not 
of  a  barratrous  character,  and  that  this  is  applicable  in  all  cases  of  such 
loss  whether  occurring  on  land  or  at  sea.  i  Phil.  Insurance  sec.  1049, 
1096.  And  in  Angell  on  Insurance  sec.  125,  it  is  stated  as  an  indisput- 
able proposition,  that  as  applied  to  policies  against  fire  on  land  the 
doctrine  has  for  a  great  length  of  time  prevailed  that  losses  occasioned 


88  LAW  AND  BUSINESS 

by  the  mere  fault  of  the  insured  or  his  servants,  unaffected  by  fraud 
or  design,  are  within  the  protection  of  the  policies,  and  as  such  are 
recoverable  from  the  underwriters.  In  Shaw  v.  Robberds,  6  Ad. 
&  El.  75,  it  is  said  by  the  court  that  the  object  of  insurance  is  to  guard 
against  the  negligence  of  servants  and  others  and  that  there  is  no 
ground  of  distinction  between  the  negligence  of  strangers  and  others 
and  that  of  the  assured  himself,  and  that  in  the  absence  of  all  fraud 
the  particular  cause  of  the  loss  is  only  to  be  looked  at.  And  in 
Huckins  v.  People's  Ins.  Co.,  n  Fost.  (N.H.)  238,  it  is  distinctly  held 
that  carelessness  and  negligence  as  such  cannot  be  held  to  be  a  defence 
to  an  action  upon  a  policy  of  insurance;  that,  in  the  absence  of  fraud, 
it  is  only  the  proximate  cause  of  the  loss  that  is  to  be  considered. 

The  same  doctrine  was  recognized  by  this  court  in  the  case  of 
Chandler  v.  Worcester  Ins.  Co.,  3  Cush.  328.  It  is  there  said  that  the 
general  rule  unquestionably  is,  that  in  cases  of  insurance  against 
fire  the  carelessness  and  negligence  of  the  agents  and  servants  of  the 
assured  constitute  no  defence.  The  defendants  in  that  case  offered 
to  show  not  only  that  the  plaintiff  had  been  guilty  of  negligence  but 
also  of  gross  misconduct.  And  the  court  in  examining  the  case,  where 
the  facts  upon  which  the  allegation  of  the  gross  misconduct  imputed 
to  the  party  were  not  reported,  expressed  an  opinion  that  it  might  be 
of  such  character,  though  not  amounting  to  a  fraudulent  intent  to 
burn  the  building,  as  to  deprive  the  assured  of  his  right  to  recover; 
and  this  for  the  reason  assigned,  that  the  misconduct  might  be  such 
as  to  manifest  a  willingness,  differing  little  from  a  fraudulent  and 
criminal  purpose,  to  commit  such  an  injury.  But  the  law  makes  a 
clear  distinction  between  even  gross  negligence  and  fraud,  and 
although  the  former  may  be  evidence  tending  to  show  mala  fides,  it 
is  not  in  fact  the  same  thing,  i  Parsons  on  Con.  571.  Goodman  v. 
Harvey,  4  Ad.  &  El.  870.  In  the  present  case,  there  is  nothing  in 
the  facts  found  to  show  either  a  fraudulent  intent  or  any  willingness 
on  the  part  of  the  plaintiff  to  set  fire  to  the  building.  On  the  contrary 
it  is  conceded  that  he  acted  in  good  faith.  And  although  his  conduct 
was  very  imprudent,  it  is  obvious,  as  well  from  his  purpose  as  from 
his  efforts  to  prevent  the  conflagration  when  the  fire  began  to  kindle, 
that  he  was  actuated  by  no  improper  motive.  These  facts  show  a 
case  of  mere  negligence,  and  therefore  are  not  sufficient  to  preclude 
him  from  his  right  to  recover  on  the  policy  an  indemnity  for  his  loss. 

Exceptions  sustained. 


DEVICES  FOR  SHIFTING  RISKS  89 

QUESTIONS 

1.  What  rule  of  law  is  laid  down  by  the  principal  case?    Is  there  any 
justification  for  the  doctrine  of  this  case  ?    Is  any  social  utility  served  by 
protecting  a  person  against  the  consequences  of  his  own  negligence  ? 

2.  P,  acting  in  a  " grossly  negligent"  manner,  sets  fire  to  an  insured  building 
and  brings  an  action  on  the  policy.    What  decision  ? 

3.  P  intentionally  sets  fire  to  his  building  and  sues  on  the  policy  for  the  loss. 
What  decision  ? 

4.  The  building  accidentally  catches  fire.    P  stands  by  and  watches  it  burn 
without  making  any  effort  to  extinguish  it  or  to  remove  its  contents. 
What  decision  in  an  action  by  him  on  the  policy  ? 

CANNON  v.  PHOENIX  INSURANCE  COMPANY 
no  Georgia  Reports  563  (1900) 

LEWIS,  J.  The  contract  between  the  parties  stipulates  that  if  a 
fire  occur  the  insured  shall  give  immediate  notice  of  any  loss  thereby 
in  writing  to  the  company,  and,  in  sixty  days  after  the  fire,  shall 
render  a  statement  to  the  company,  signed  and  sworn  to  by  the 
insured,  stating  the  knowledge  and  belief  of  the  insured  as  to  the  time 
and  origin  of  the  fire,  etc.  It  is  further  stipulated  that  no  suit  or 
action  on  the  policy  for  the  recovery  of  any  claim  shall  be  sustainable 
in  any  court  of  law  or  equity,  until  full  compliance  by  the  insured 
with  this  requirement.  Under  the  stipulations  in  the  policy  there 
can  be  no  question  that,  as  a  condition  precedent  to  the  payment  of 
the  loss,  the  proofs  of  loss  should  be  submitted  to  the  company 
within  the  time  prescribed.  Southern  Home  Assn.  v.  Home  Ins.  Co., 
94  Ga.  167-69.  The  sufficiency  of  such  proofs  on  the  trial  of  the  case 
is  a  question  for  the  court,  and,  to  be  sufficient,  they  should  show  a 
loss  within  the  terms  of  the  policy.  Travelers  Ins.  Co.,  v.  Sheppard, 
85  Ga.  751-761-64.  The  question  then  is  whether  the  proofs  of  loss 
submitted  in  this  case  were  within  the  meaning  of  this  policy. 

It  seems  that  in  arranging  the  stove  on  the  ground  floor  of  the 
building  the  day  before  the  damage,  the  pipe,  which  extended  through 
the  ceiling  of  the  second  floor,  became  disengaged  at  that  ceiling, 
and  that,  when  the  fire  was  built  in  the  stove  on  the  next  morning, 
smoke  and  soot  escaped  from  the  pipe  into  the  second-story  room 
where  the  damaged  goods  were  situated.  The  damage  claimed, 
therefore,  in  the  notice  of  the  loss,  was  by  reason  of  the  smoke  and 
soot,  and  of  the  water  used  in  cooling  the  ceiling.  It  does  not  appear 


90  LAW  AND  BUSINESS 

from  the  proofs  of  loss  that  there  was  any  fire  in  or  about  the  building 
except  in  the  stove  where  it  was  intended  to  be  built.  This  fire  did 
not  spread  from  where  it  was  built  and  intended  to  remain.  It  was, 
therefore,  all  the  time  during  the  alleged  injury  and  damage  to  the 
goods,  what  is  termed  in  the  books  a  "friendly"  and  not  a  "hostile" 
fire.  It  is  true  that  there  is  sound  authority  for  the  proposition  that  an 
insured  can  recover  loss  occasioned  by  smoke,  soot,  etc.,  thrown  out 
by  a  fire;  but  we  think  in  these  cases  it  will  be  found  that  such  a  matter 
causing  injury  was  the  product  of  a  hostile  fire.  If  a  fire  should  break 
out  from  where  it  was  intended  to  be,  and  become  a  hostile  element 
by  igniting  property,  although  it  might  not  actually  burn  the  property 
insured,  yet  if  it  caused  injury  thereto  by  smoke  or  heat,  or  other 
direct  means,  damages  would  be  recoverable.  But  this  is  not  the  case. 
In  i  Wood  on  Fire  Insurance,  sec.  103,  the  following  principle  is 
announced,  directly  applicable  to  the  facts  in  this  case:  "Where 
fire  is  employed  as  an  agent,  either  for  the  ordinary  purposes  of 
heating  the  building,  for  the  purposes  of  manufacture  or  as  an  instru- 
ment of  art,  the  insurer  is  not  liable  for  the  consequences  thereof, 
so  long  as  the  fire  itself  is  confined  within  the  limits  of  the  agencies 
employed,  as,  from  the  effects  of  smoke  or  heat  evolved  thereby,  or 
escaping  therefrom,  from  any  cause  whether  intentional  or  accidental. 
In  order  to  bring  such  consequences  within  the  risk,  there  must  be 
actual  ignition  outside  of  the  agencies  employed,  not  purposely 
caused  by  the  assured,  and  these,  as  a  consequence  of  such  ignition, 
dehors  the  agencies."  This  seems  to  have  been  an  early  principle 
decided  in  England,  and  the  author  refers  to  that  decision  in  a  note 
to  the  text  just  quoted.  See  Austin  v.  Drew,  6  Taunt.  435.  In  the 
case  of  Gibbons  v.  German  Insurance  Institution,  30  111.  App.  263, 
it  was  decided  that  an  ordinary  fire  insurance  policy  does  not  cover 
a  loss  caused  by  escaping  steam  from  a  break  in  steam-heating 
apparatus.  GARY,  J.,  says  in  his  opinion  that  in  principle  that  case 
was  the  same  as  Austin  v.  Drew,  where,  by  the  omission  to  open  a 
register  in  an  upper  story  of  a  seven-  or  eight-story  building,  smoke 
and  heat  came  into  lower  stories  and  caused  damage.  He  quotes 
the  following  language  from  GIBB,  C.  J.,  in  that  case:  "There  was  no 
fire  except  in  the  stove  and  the  flue — as  there  ought  to  have  been — • 
and  the  loss  was  occasioned  by  the  confinement  of  the  heat.  Had 
the  fire  been  brought  out  of  the  flue,  and  anything  had  been  burnt, 
the  company  would  have  been  liable.  But  can  this  be  said  where  the 
fire  never  was  at  all  excessive,  and  was  always  confined  within 


DEVICES  FOR  SHIFTING  RISKS  91 

its  proper  limits  ?  This  is  not  a  fire  within  the  meaning  of  the  policy, 
nor  a  loss  which  the  company  undertakes  to  insure  against.  They 
may  as  well  be  sued  for  the  damage  done  to  drawing  room  furniture 
by  a  smoky  chimney."  In  the  language  of  GARY,  J.,  in  his  opinion: 
"If  the  fire  were  a  moral  agent,  no  blame  could  be  imputed  to  it. 
It  was  doing  its  duty  and  no  more.  The  damage  was  caused  by 
another  agent  who,  undertaking  to  transmit  the  beneficial  influence 
of  the  fire,  broke  down  in  the  task."  See  case  of  American  Towing  Co. 
v.  German  Fire  Ins.  Co.,  74  Md.  25,  and  the  able  opinion  of  ALVEY, 
C.  J.,  on  p.  34.  et.  seq. 

Neither  is  the  plaintiff  entitled  to  recover  any  damages  caused 
by  the  water  used  in  cooling  a  portion  of  the  ceiling  heated  by  the 
pipe.  In  the  proofs  of  loss  it  is  not  claimed  that  anything  was  actually 
ignited  by  this  heat,  and  it  does  not  appear  that  the  use  of  the  water 
was  necessary  to  prevent  ignition. 

It  is  contended  that  the  court  erred  in  refusing  to  allow  plaintiff's 
counsel  to  show  that,  after  making  out  their  proofs  of  loss,  they  dis- 
covered that  some  of  the  laths  and  joists  had  actually  become  ignited 
and  were  charred.  Even  if  this  were  true  and  damage  were  caused 
to  the  property  of  plaintiff  by  this  ignition,  it  would  not  have  been 
admissible  in  the  trial  of  the  present  case,  for  the  reason  that  no  proof 
thereof  had  been  made  and  presented  to  the  company  prior  to  the 
institution  of  this  suit;  and  it  does  not  appear  from  the  record  that 
this  fact  was  not  discovered  by  plaintiff  before  suit  was  brought. 
Besides,  there  was  nothing  in  the  testimony  offered  which  in  the  least 
tends  to  indicate  that  any  injury  or  damage  was  done  the  goods  of 
plaintiff  by  virtue  of  the  igniting  or  charring  of  the  laths  or  joists  of 
the  building.  It  is  not  pretended  even  that  the  smoke  and  soot  which 
injured  the  property  proceeded  from  that  fire.  Our  conclusion, 
therefore,  is  that  the  court  did  not  err  in  rejecting  the  testimony 
offered,  and  in  granting  a  non-suit. 

Judgment  affirmed. 

QUESTIONS 

1.  What  was  the  peril  insured  against  by  the  policy  under  consideration 
in  this  case?    Did  not  the  plaintiff  suffer  damage  by  reason  of  this 
peril?    If  so,  why  was  he  denied  a  recovery? 

2.  Why  was  the  plaintiff  not  permitted  to  show  that  some  of  the  laths  and 
joists  about  the  flue  of  his  house  had  been  burned  ? 

3.  D  insures  the  house  of  P  "against  all  direct  loss  or  damage  by  fire." 
P's  house  is  struck  by  lightning  and  torn  to  pieces.    P  sues  on  the 
policy  for  the  loss.    What  decision  ? 


92  LAW  AND  BUSINESS 

4.  In  the  foregoing  case,  the  stroke  of  lightning  sets  fire  to  the  building 
and  destroys  it.    What  decision  in  an  action  by  P  on  the  policy? 

5.  P  sues  on  the  policy,  alleging  and  proving  that  great  damage  was  done  to 
his  house  by  reason  of  the  explosion  of  the  furnace  boiler.    What 
decision  ? 

6.  What  is  the  difference  between  a  hostile  and  a  friendly  fire?    Against 
which  is  an  insured  protected  by  a  fire  insurance  policy  ? 

ERMENTROUT  v.  GIRARD  FIRE  INSURANCE  COMPANY 

63  Minnesota  Reports  305  (1895) 

MITCHELL,  J.  This  action  was  brought  on  a  policy  issued  by  the 
defendant  to  the  plaintiff  Ermentrout,  insuring  him,  to  the  amount  of 
$1,000,  for  one  year  "against  all  direct  loss  or  damage  by  fire,"  on 
his  "brick,  iron-roof,  grain  warehouse  building,  and  bins  therein, 
including  foundations  and  all  permanent  fixtures,"  etc.  The  only 
other  provisions  of  the  policy  involved  on  this  appeal  are  as  follows: 
"  If  a  building  or  any  part  thereof  fall,  except  as  the  result  of  fire,  all 
insurance  by  this  policy  on  such  building  or  its  contents  shall  immedi- 
ately cease."  "If  fire  occur,  the  insured  shall  give  immediate  notice 
of  any  loss  thereby  in  writing  to  this  company."  "The  sum  for  which 
this  company  is  liable,  pursuant  to  this  policy,  shall  be  payable  60  days 
after  due  notice,  ascertainment,  estimate,  and  satisfactory  proof  of 
the  loss  have  been  received  by  this  company,  in  accordance  with  the 
terms  of  this  policy." 

When  the  plaintiff  rested,  the  defendant  moved  to  dismiss  the 
action  for  the  reason  that  plaintiff  had  failed  to  establish  his  cause 
of  action,  in  that,  first,  it  did  not  appear  that  the  loss  or  damage  was 
the  direct  result  of  fire;  second,  that  it  did  appear  that  the  plaintiff 
had  not  given  immediate  notice  of  the  loss  in  writing  to  the  company. 
The  judge  granted  the  motion,  although  placing  his  decision  exclu- 
sively on  the  last  ground.  Of  course,  if  the  action  should  have  been 
dismissed  on  either  ground,  the  ruling  of  the  court  must  be  affirmed. 

The  insured  building  was  adjacent  to  another  used  as  a  feed  mill, 
the  wall  between  them  being  a  partition  wall.  There  is  no  claim 
that  any  part  of  the  insured  building  was  actually  ignited  or  consumed 
by  fire.  The  fire  was  confined  to  the  adjacent  feed  mill,  which  fell, 
carrying  down  with  it  the  partition  wall  and  a  part  of  the  elevator 
insured,  and  the  question  to  which  both  the  examination  and  the 
cross-examination  of  plaintiff's  witnesses  seem  to  have  been  directed 
was  whether  the  fall  caused  the  fire  or  the  fire  caused  the  fall.  While 


DEVICES  FOR  SHIFTING  RISKS  93 

the  evidence  offered  by  plaintiff  was  not  of  the  most  convincing  or 
satisfactory  character,  yet  we  think  it  was  such  that  the  jury  might 
have  found  either  way  on  the  question.  We  think  that,  as  the  evi- 
dence stood  when  plaintiff  rested,  it  would  have  justified  the  jury  in 
finding  that  the  feed  mill  caught  fire  before  it  fell,  and  that  the  fall 
was  caused  by  the  partial  consumption  of  the  feed  mill,  and  the 
weakening  of  the  partition  wall  by  the  fire.  If  such  were  the  facts, 
then  we  think  the  falling  of  the  insured  building  was  a  "direct  loss 
or  damage  by  fire,"  within  the  meaning  of  the  policy. 

The  provision  that,  if  the  building  fell,  "except  as  the  result  of 
fire,"  the  insurance  thereon  shall  cease,  was  introduced  into  the  policy 
by  the  insurer  for  its  own  benefit,  and,  under  a  familiar  rule,  must  be 
construed,  in  case  of  ambiguity,  most  strongly  against  it.  We  think 
it  has  reference  only  to  cases  where  the  building  might  fall  from  some 
other  cause  than  fire,  as  for  example,  defective  construction,  the 
withdrawal  of  necessary  support,  storm,  flood,  or  other  like  cause — 
and  fire  thereafter  ensued.  But  it  was  not  intended  to  exclude  cases 
where  fire  was  the  immediate  or  proximate  cause  of  the  fall.  To 
render  the  fire  the  immediate  or  proximate  cause  of  the  loss  or  damage, 
it  is  not  necessary  that  any  part  of  the  insured  property  actually 
ignited  or  was  consumed  by  fire.  This  is  so  well  settled  that  the 
citation  of  authorities  in  support  of  the  proposition  is  unnecessary. 

The  question  is,  was  fire  the  efficient  and  proximate  cause  of  the 
loss  or  damage?  Thus,  in  one  case,  where  a  house  protected  by  a 
policy  of  insurance  against  damage  by  fire  was  injured  by  the  falling 
of  part  of  the  wall  of  an  adjacent  house,  in  consequence  of  fire  in  the 
latter  house,  it  was  held  that  the  fire  was  the  proximate  cause  of  the 
loss,  and  that  the  insurers  were  liable,  although  the  house  insured  had 
never  been  on  fire.  Johnston  v.  West  of  Scotland  Ins.  Co.,  7  Shaw  &  D. 
Set.  Ct.  Sess.  52.  The  word  "direct,"  in  the  policy,  means  merely 
"immediate,"  or  "proximate"  as  distinguished  from  "remote." 
Counsel  for  defendant  cites,  in  support  of  a  contrary  view,  some 
language  used  by  way  of  illustration  in  California  Ins.  Co.  v.  Union 
Compress  Co.,  133,  U.S.  387,  416,  10  Sup.  Ct.  365,  372,  in  which  the 
court  names  "destruction  through  the  falling  of  burning  walls"  as  an 
instance  of  remoteness  of  agency.  The  question  was  not  before  the 
court,  for  in  that  case  the  insured  property  was  physically  burned  by 
the  direct  action  of  fire.  If  the  court  meant  what  counsel  claims,  we 
cannot  avoid  the  conclusion  that  the  illustration  was,  to  say  the  least 
of  it,  an  unfortunate  one. 


94  LAW  AND  BUSINESS 

Our  conclusion  is  that  the  court  was  right  in  dismissing  the  action, 
on  the  ground  that  plaintiff  had  failed  to  give  notice  of  loss  as 
required  by  the  policy. 

Order  affirmed. 
QUESTIONS 

1.  D  insures  P's  house  against  losses  "caused  directly  and  immediately 
by  fire."    P's  house  catches  fire.    Little  damage  is  done  to  the  building 
or  its  contents  by  the  blaze;  but  great  damage  is  done  to  the  contents 

j  of  the  building  by  the  fire  department  in  extinguishing  the  blaze.    What 
are  the  rights  of  P  against  D  on  the  policy  ? 

2.  In  the  foregoing  case,  P  and  others  remove  the  contents  of  the  building 
to  the  street.    The  goods  are  damaged  by  exposure  to  the  weather.    In 
an  action  by  P  on  the  policy,  P  makes  a  claim  for  this  damage  as  a  loss 
under  the  policy.    What  decision? 

3.  In  the  foregoing  case,  P  claims  damage  for  goods  stolen  while  the  fire 
was  being  extinguished.    What  decision  ? 

4.  With  the  permission  of  the  insurer,  P  stored  gunpowder  on  his  insured 
premises.    Through  the  carelessness  of  a  stranger,   the  powder  was 
ignited;  an  explosion  resulted,  destroying  P's  building.    P  sues  on  the 
policy  for  the  loss.    What  decision  ? 

5.  In  order  to  prevent  the  spread  of  a  serious  conflagration,  the  city  causes 
P's  building,  among  others,  to  be  dynamited.    P  sues  D  on  his  policy, 
insuring  the  building  against  "direct  and  immediate  losses  by  fire." 
What  decision  ? 

6.  P's  house  is  in  the  path  of  a  serious  fire  and  will  inevitably  burn.    He 
removes  his  goods  therefrom  and  stores  them  nearby.    T  steals  about 
$500  worth  of  the  goods.    P  sues  D  on  the  policy  for  the  loss.    What 
decision  ? 

THE  AMICABLE  SOCIETY  v.  BOLLAND 
4  Bligh's  Reports,  New  Series,  194  (1830) 

The  LORD  CHANCELLOR.  The  circumstances  of  the  case  are 
shortly  these:  In  January,  1815,  Henry  Fauntleroy  insured  his  life 
with  the  Amicable  Insurance  Society.  In  the  month  of  May  in  the 
same  year  he  committed  a  forgery  on  the  Bank  of  England.  He  con- 
tinued to  pay  the  premiums  upon  his  insurance  for  a  considerable 
period  of  time.  In  the  year  1824,  he  was  apprehended  and  on  the 
twenty-ninth  of  October  in  that  year  he  was  declared  a  bankrupt,  and 
an  assignment  of  his  effects  was  made  to  the  respondents.  On  the 
following  day,  the  thirtieth  of  October,  he  was  tried  for  his  forgery; 
he  was  found  guilty,  sentenced  to  death,  and  in  the  month  of  Novem- 
ber following  was  executed. 


DEVICES  FOR  SHIFTING  RISKS  95 

The  question  under  these  circumstances  is  this:  whether  the 
assignees  can  recover  against  the  insurance  company  the  amount  of 
this  insurance;  that  is  to  say,  whether  a  party,  effecting  with  an 
insurance  company,  an  insurance  on  his  life,  and  afterward  committing 
a  capital  felony,  being  tried,  convicted,  and  finally  executed,  whether, 
under  such  circumstances,  the  parties  representing  him,  and  claiming 
under  him,  can  recover  the  sum  insured  in  the  policy  so  effected.  I 
attended  to  the  argument  at  the  bar  in  conjunction  with  the  Noble 
Lord  Radnor  now  present,  and  we  have  both  come  to  the  conclusion 
that  the  assignees  cannot  maintain  this  suit. 

It  appears  to  me  that  this  resolves  itself  into  a  very  plain  and 
simple  consideration.  Suppose  that  in  the  policy  itself  this  risk  had 
been  insured  against:  that  is,  that  the  party  insuring  had  agreed  to 
pay  a  sum  of  money  year  by  year,  upon  condition,  that  in  the  event 
of  his  committing  a  capital  felony,  and  being  tried,  convicted,  and 
executed  for  that  felony,  his  assignees  shall  receive  a  certain  sum  of 
money — is  it  possible  that  such  a  contract  could  be  sustained  ?  Is  it 
not  void  upon  the  plainest  principles  of  public  policy  ?  Would  not 
such  a  contract  (if  available)  take  away  one  of  those  restraints 
operating  on  the  minds  of  men  against  the  commission  of  crimes? 
Namely,  the  interest  we  have  in  the  welfare  and  prosperity  of  our 
connections.  Now,  if  a  policy  of  that  description,  with  such  a  form 
of  conditions  inserted  in  it  in  express  terms,  cannot,  on  grounds  of 
public  policy,  be  sustained,  how  is  it  to  be  contended  that  in  a  policy 
expressed  in  such  terms  as  the  present,  and  after  the  events  which 
have  happened,  that  we  can  sustain  such  a  claim?  Can  we,  in 
considering  this  policy,  give  to  it  the  effect  of  that  insertion,  which  if 
expressed  in  terms  would  have  rendered  the  policy,  as  far  as  that 
condition  went  at  least,  altogether  void  ? 

Upon  this  short  and  plain  ground,  therefore,  independently  of 
the  more  complicated  arguments  referred  to  by  the  counsel  at  the 
bar,  in  the  discussion  of  this  case,  I  think  that  this  policy  cannot  be 
sustained,  and  that  the  respondents  are  not  entitled  to  recover.  I 
submit,  therefore,  that  the  judgment  of  the  court  below  ought,  under 
these  circumstances,  to  be  reversed. 

Judgment  reversed. 

QUESTIONS 

i.  X  insures  his  life  in  favor  of  his  wife.  He  was  indicted,  convicted, 
and  executed  for  murder.  W  brings  an  action  on  the  policy  for  the  loss. 
What  decision  ? 


96  LAW  AND  BUSINESS 

2.  In  the  foregoing  case,  in  her  action  on  the  policy,  W  offers  evidence  tend- 
ing to  prove  that  X's  conviction  was  contrary  to  the  evidence.     Should 
the  evidence  be  admitted? 

3.  W  insures  the  life  of  her  husband  in  her  own  favor.    He  is  indicted, 
convicted,  and  executed  for  murder.    What  decision  in  an  action  by 
W  on  the  policy  ? 

4.  D  issues  a  policy  of  insurance  to  X,  which  provides  that  there  can  be  no 
recovery  if  the  insured  meets  his  death  while  engaged  in  the  known 
violation  of  the  law.    X  sees  D,  his  debtor,  approaching,  leading  two 
horses.    X,  wishing  to  collect  his  debt,  seizes  the  horses.    D  shoots 
him.    This  is  an  action  on  the  policy  by  X's  personal  representative. 
What  decision  ? 

5.  In  the  foregoing  case,  X  attempts  to  rob  Y.    Y  shoots  him.    What 
decision  in  an  action  on  the  policy  ? 

6.  X  commits  suicide.    What  decision  in  an  action  on  the  policy  ? 

PATTERSON  v.  MUTUAL  LIFE  INSURANCE  COMPANY 

100  Wisconsin  Reports  118  (1898) 

This  is  an  action  to  recover  upon  an  insurance  policy  issued  by 
the  appellant  July  20, 1895,  upon  the  life  of  Alexander  W.  Patterson, 
and  originally  payable  to  the  administrators,  executors,  or  assigns  of 
the  insured.  On  the  fourth  of  October,  1895,  the  policy  was  assigned 
with  the  consent  of  the  company  to  the  plaintiffs,  who  are  the  children 
of  the  insured. 

Alexander  W.  Patterson  was  forty-nine  years  of  age  at  the  time  of 
the  issuance  of  the  policy,  and  was  then  married  to  his  second  wife,  by 
whom  he  had  no  children,  the  plaintiffs  being  his  children  by  a  previ- 
ous marriage.  The  first  year's  premium  upon  the  policy  was  paid, 
and  the  insured  died  by  his  own  hand  February  25,  1896.  Proofs  of 
the  death  were  duly  made. 

A  verdict  for  the  plaintiffs  was  directed  for  the  face  of  the  policy, 
and  from  judgment  thereon  the  defendant  appeals. 

WINSLOW,  J.  There  was  evidence  tending  to  show  that  the 
deceased  was  sane  when  he  shot  himself;  hence,  the  verdict  having 
been  directed,  it  must  be  assumed  upon  this  appeal  that  such  was  the 
fact.  Starting  from  this  basis,  the  argument  of  the  defendant  is,  in 
substance,  (i)  That  intentional  self-destruction  while  sane  is  not  a 
risk  covered  by  a  policy  of  life  insurance,  even  when  there  is  no 
clause  in  the  policy  specifically  exempting  the  company  from  liability 
for  such  death;  (2)  the  incontestable  clause  does  not  cover  such  a 


DEVICES  FOR  SHIFTING  RISKS  97 

death,  and,  even  if  it  be  held  to  do  so  by  its  terms,  such  a  stipulation 
would  be  void,  as  against  public  policy;  (3)  intentional  self-destruction 
while  sane  is  a  crime,  and  hence  the  stipulation  providing  that  death 
in  violation  of  law  is  not  a  risk  assumed  by  the  company  defeats-a- 
recovery. 

Upon  the  first  proposition,  reliance  is  placed  upon  the  recent 
decision  of  the  Supreme  Court  of  the  United  States  in  the  case  of 
Ritter  v.  Mut.  L.  Ins.  Co.,  169  U.S.  139.  In  this  case  it  was  distinctly 
held  that  intentional  self-destruction  by  the  assured  while  sane  is  not 
a  risk  covered  by  a  life  insurance  policy,  even  when  the  policy  contains 
no  exception  as  to  such  a  death;  and  it  was  further  said  that  such  a 
risk  could  not  legally  be  covered  by  a  policy,  because  it  would  be 
against  public  policy  to  make  such  a  contract.  This  was  an  action 
by  the  executors  of  the  estate  of  the  assured  upon  a  policy  payable 
directly  to  his  executors,  administrators,  and  assigns;  and  there 
was  much  evidence  tending  to  show  that  the  assured  deliberately 
effected  this,  and  a  large  amount  of  other  life  insurance,  with  the 
intention  of  committing  suicide,  and  thus  enriching  his  estate  and 
paying  his  debts.  Another  and  perhaps  the  only  other  direct  adjudi- 
cation to  the  same  effect  is  the  decision  in  the  case  of  Supreme  Com- 
mandery  K.G.R.  v.  Ainsworth,  71  Ala.  436.  The  principle  upon  which 
these  decisions  rest  is  thus  well  stated  in  the  last-named  case:  " Death, 
the  risk  of  life  insurance,  the  event  upon  which  the  insurance  money 
is  payable,  is  certain  of  occurrence.  The  uncertainty  of  the  time 
of  its  occurrence  is  the  material  element  and  consideration  of  the 
contract.  It  cannot  be  in  the  contemplation  of  the  parties  that  the 
assured  by  his  own  criminal  act  shall  deprive  the  contract  of  its 
material  element — shall  vary  and  enlarge  the  risk  and  hasten  the 
day  of  payment." 

The  authorities  upon  which  these  decisions  are  principally  based 
consist  of  certain  expressions  of  opinion  contained  in  Hartman  v. 
Keystone  Ins.  Co.,  21  Pa.  St.  466;  Moore  v.  Woolsey,  4  El.  &  Bl.  243; 
and  Amicable  Soc.  v.  Holland,  4  Bligh  (N.S.)  194,  in  only  one  of  which 
cases,  however,  was  the  question  directly  in  issue.  Support  for  the 
proposition  is  also  drawn  from  the  well-established  principle  of  the  law 
of  fire  insurance,  that,  if  the  insured  intentionally  set  fire  to  the  prop- 
erty insured,  and  destroy  it,  he  cannot  recover  for  the  loss.  It  is  cer- 
tainly not  to  be  denied  that  the  reasoning  in  favor  of  the  proposition  is 
cogent,  and  were  the  question  a  new  one  in  the  law,  the  argument 
would  be  well-nigh  irresistible,  especially  where,  as  in  the  Ritter  Case, 


98  LAW  AND  BUSINESS 

the  policy  runs  in  favor  of  the  estate  of  the  insured,  and  the  proceeds 
will  go  to  the  enrichment  of  such  estate,  instead  of  to  other  bene- 
ficiaries. But  it  is  by  no  means  a  new  question,  and  there  are  numer- 
ous authorities  which  directly  hold  that,  where  life  insurance  is 
effected  for  the  benefit  of  wife  or  children,  suicide  while  sane  is  not  a 
defense  in  the  absence  of  a  condition  or  exception  to  that  effect  in 
the  policy.  Fitch  v.  Am.  P.L.  Ins.  Co.,  59  N.Y.  557;  Darrow  v. 
Family  F.  Soc.,  116  N.Y.  537;  Patrick  v.  Excelsior  L.  Ins.  Co.,  67 
Barb.  202;  M ills  v.  Rebstock,  29  Minn.  380;  Ken  v.  Minn.  M.B. 
Asso.,  39  Minn.  174;  N.W.B.  &*  M.S.  Asso.  v.  Wanner,  24  111.  App. 
357.  This  principle  was  stated  as  the  law  in  McCoy  v.  N.W.  Mut.  R. 
Asso.,  92  Wis.  577,  although  it  probably  was  not  directly  involved  in 
that  case.  The  American  textbooks  which  treat  of  the  subject  very 
generally  state  this  to  be  the  law.  i  May,  Insurance  sec.  3  24 ;  Niblack, 
Ben.  Soc.  6*  Ace.  Ins.  sec.  156;  3  Joyce,  Insurance  sec.  2653;  3  Am.  &• 
Eng.  Ency.  of  Law  (2d  ed.)  1016.  While  these  textbook  citations  may 
not  be  considered  as  very  convincing,  they  certainly  tend  to  show  the 
general  impression  prevailing  among  the  legal  profession  upon  the 
subject,  and  that  impression  certainly  prevailed  in  the  Supreme  Court 
of  tie  United  States  when  the  case  of  Life  Ins.  Co.  v.  Terry,  15  Wall. 
580,  was  decided;  for  in  that  case  Mr.  JUSTICE  HUNT  refers  to  the 
contrary  dictum  in  Hartman  v.  Keystone  Ins.  Co.,  21  Pa.  St.  466,  as 
confessedly  unsound.  The  fact  that  insurance  companies  have 
almost  universally  deemed  it  necessary  to  insert  in  their  policies 
provisions  exempting  them  from  liability  in  case  of  suicide,  "sane 
or  insane,"  may  perhaps  also  be  considered  as  showing  the  general 
trend  of  opinion  upon  the  subject  in  insurance  circles;  but,  whether 
this  deduction  is  to  be  properly  drawn  or  not,  we  think  it  certain  that 
the  fact  that  life  insurance  policies  universally  contain  this  provision 
is  of  weight  in  determining  the  construction  now  to  be  placed  upon  a 
policy  which  omits  all  specific  reference  to  suicide,  and  also  ostenta- 
tiously contains  a  clause  providing  that  it  shall  be  absolutely 
incontestable  for  any  cause  save  for  non-payment  of  premiums  or  mis- 
statement  of  age.  What  would  an  applicant  for  insurance  be  entitled 
to  think  was  the  meaning  of  such  a  policy,  when  presented  to  him, 
garnished  with  the  usual  and  customary  commendations  of  the  average 
solicitor  of  insurance?  Certainly  he  would  not  think  that  its  legal 
effect  was  the  same  as  that  of  a  policy  containing  the  usual  provisions 
against  suicide,  sane  or  insane. 


DEVICES  FOR  SHIFTING  RISKS  99 

The  policy  before  us  was  originally  payable  to  the  administrators, 
executors,  or  assigns  of  Patterson;  but  within  a  few  days  it  was 
assigned,  with  the  consent  of  the  company,  to  the  plaintiffs,  his 
children,  and  so  remained.  After  this  assignment  it  was  no  longer 
a  policy  in  favor  of  Patterson's  estate,  but  in  favor  of  his  children, 
as  beneficiaries,  as  much  as  though  originally  made  payable  to  them. 
Under  the  decision  of  this  court  in  Foster  v.  Gile,  50  Wis.  603,  such  a 
beneficiary  has  an  actual,  subsisting  interest  in  the  policy,  subject  to 
the  right  of  the  insured,  who  has  paid  the  premiums,  to  vest  it  else- 
where, but  until  such  action  by  the  assured,  the  interest  of  the  bene- 
ficiary is  such  a  vested,  subsisting  interest  as  would  pass  to  the 
administrator  of  the  beneficiary  in  case  of  his  death.  Such  being 
the  case,  it  falls  directly  within  the  principle  of  the  New  York  and 
Minnesota  cases  before  referred  to,  which  hold  that,  as  against  such  a 
beneficiary,  suicide  of  the  insured  while  sane  is  not  a  defense,  in  the 
absence  of  a  provision  in  the  policy.  Nor  would  the  application  of 
that  principle  to  this  case  necessarily  conflict  with  the  Ritter  Case, 
where  the  policy  was  in  favor  of  the  estate  of  the  insured.  It  may 
well  be  in  such  a  case  that  the  intentional  suicide  of  the  insured  while 
sane  would  prevent  a  recovery  by  his  personal  representatives,  and 
yet  not  prevent  a  revocation  in  case  of  a  policy  in  favor  of  beneficiaries 
who  had  a  subsisting,  vested  interest  in  the  policy,  at  the  time  of  the 
suicide,  and  who  could  not,  if  they  would,  prevent  the  act  of  the 
insured. 

In  determining  what  rule  should  be  adopted  by  this  court  in  the 
present  case,  there  are  numerous  considerations  which  deserve  atten- 
tion. It  must  be  borne  in  mind  that  the  suicide  clause  has  become 
so  universal  in  policies  that  its  absence  at  once  attracts  attention.  It 
can  hardly  be  otherwise  than  that  the  agent  soliciting  insurance  under 
such  a  policy  as  this  would  at  once  call  attention  to  its  apparent 
liberality,  in  that  there  was  no  suicide  clause,  and,  further,  that  there 
was  in  addition  an  "absolutely  incontestable"  clause;  and  the 
average  layman  (not  to  say  lawyer),  in  looking  it  over,  would  con- 
clude that  it  was  in  fact  a  very  favorable  policy  to  the  insured.  These 
provisions  are  all  carefully  framed  by  the  insurance  company,  and 
expressly  framed  to  induce  people  to  insure;  and  the  principle  is 
familiar  and  just  that,  when  the  policy  is  capable  of  two  meanings, 
that  which  is  most  favorable  to  the  insured  is  always  to  be  adopted. 
Utter  v.  Travelers'  Ins.  Co.,  65  Mich.  545.  In  at  least  one  state 
(Missouri)  there  exists  a  statute  which  prohibits  the  defense  of  suicide, 


loo  LAW  AND  BUSINESS 

except  when  it  was  contemplated  at  the  time  of  effecting  the  insurance, 
and  makes  void  any  contrary  stipulation  in  the  policy.  R.  S.  of  Mo., 
1889,  sec.  5855.  This  statute  has  been  enforced  by  the  courts  of 
Missouri,  and  by  the  Circuit  Court  of  Appeals  of  the  United  States, 
without  apparent  question  as  to  its  validity  on  the  ground  of  public 
policy.  Keller  v.  Travelers '  Ins .  Co . ,  5 8  Mo .  App .557;  Knights '  Temp- 
lar &  M.L.I.  Co.  v.  Berry,  4  U.S.  App.  353,  50  Fed.  Rep.  511.  Bearing 
these  things  in  mind,  and  while  conceding  the  strength  of  the  argu- 
ments upon  public  policy  on  which  the  Ritter  Case  is  based,  we  still 
think,  in  view  of  the  prior  decisions  cited  above  to  the  contrary  of  the 
rule  there  laid  down,  and  the  general  apparent  acquiescence  in 
those  decisions  by  the  courts  and  by  the  people,  that  we  ought  to  hold, 
in  accordance  with  those  decisions,  that,  in  a  case  where  third  persons 
are  beneficiaries,  intentional  suicide  of  the  insured  while  sane  does 
not  avoid  the  policy,  in  the  absence  of  any  provision  in  the  policy 
to  that  effect.  Whether  the  rule  would  apply  to  a  case  where  the 
personal  representatives  of  the  insured  were  bringing  the  action  for 
the  benefit  of  the  estate  of  the  insured  is  not  decided,  because  that 
case  is  not  before  us.  In  so  holding,  it  becomes  unnecessary  to 
consider  the  effect  of  the  incontestable  clause  upon  this  branch  of  the 
case. 

We  now  come  to  consider  the  effect  of  the  clause  providing  that 
death  "in  consequence  of,  or  in  violation  of  the  law,"  is  not  a  risk 
covered  by  the  policy.  It  is  truly  said  that  intentional  suicide  while 
sane  was  a  felony  at  common  law.  It  was  punished  by  forfeiture  of 
goods,  but,  as  we  do  not  inflict  such  punishments,  it  is  now  little  more 
than  the  shadow  of  a  crime.  Technically,  it  is  still  a  crime  in  this 
state,  because  we  have  retained  the  common  law  so  far  as  it  is  not 
inconsistent  with  our  laws  and  general  situation,  but  it  is  not  a  crime 
within  the  ordinary  meaning  of  the  term,  or  any  usual  definition, 
because  we  have  no  statute  punishing  either  suicide  or  attempted  sui- 
cide. Mr.  Bishop's  definition  of  a  crime  (i  Bish.  New  Cr.  Law,  sec.  32) 
is  "any  wrong  which  the  government  deems  injurious  to  the  public 
at  large,  and  punishes  through  a  judicial  proceeding  in  its  own  name." 
This  was  approved  by  this  court  in  Petition  of  Bergin,  31  Wis.  383. 
Such  is  undoubtedly  the  general  conception  of  a  criminal  offense, 
namely,  a  violation  of  law  for  which  there  is  a  punishment.  Words 
are  to  be  understood  in  their  generally  understood  and  accepted 
meaning.  Now,  as  before  said,  the  insurance  company  has  deliber- 


DEVICES  FOR  SHIFTING  RISKS  IOI 

ately  struck  out  the  usual  suicide  clause  from  their  policy,  and  put  in 
an  "absolutely  incontestable"  clause.  Is  it  reasonable  to  say  that 
they  have  in  fact  retained  the  suicide  provision,  artfully  concealed 
under  a  form  of  words  which  not  one  person  in  a  hundred  would' 
suspect  meant  to  include  it  ?  We  think  not.  The  rule  that  in  case 
of  doubt  or  ambiguity  the  language  used  (being  the  company's  own 
language)  must  be  construed  most  strongly  against  it,  again  applies. 
Certainly,  if  this  clause  were  held  to  include  suicide,  the  language  of 
the  policy  would  be  grossly  misleading.  Kerr  v.  Minn.  M.B.  Asso., 
39  Minn.  174.  The  New  York  courts  have  held  suicide  not  a  crime, 
because  common-law  crimes  have  been  abolished  in  that  state. 
D arrow  v.  Family  F.  Soc.,  116  N.Y.  537. 

But  it  is  further  claimed  by  the  defendant  that  the  evidence 
tended  to  show  a  fraudulent  scheme  on  the  part  of  Patterson,  when 
he  took  out  his  policy,  to  obtain  insurance  on  his  life  for  the  purpose  of 
thereafter  committing  suicide,  and  defrauding  the  company  for  the 
benefit  of  his  children.  Doubtless,  this  would  be  a  good  defense,  if 
shown,  unless  it  be  cut  off  by  the  "incontestable  clause."  It  would 
be  a  defense  not  based  on  the  suicide  alone,  but  on  the  whole  fraud, 
of  which  the  act  of  suicide  was  only  the  ultimate  step.  But  the 
difficulty  is  that  we  have  been  unable  to  find  any  evidence  which  would 
justify  the  submission  of  that  question  to  the  jury.  It  is  said  that  he 
falsely  represented  his  state  of  health  in  his  application,  and  concealed 
some  of  the  grounds  upon  which  he  had  previously  made  application 
for  a  pension.  There  does  not  seem  to  be  much  merit  in  the  claim. 
He  submitted  himself  for  examination  to  the  company's  medical 
examiner,  who  reported  that  he  had  dyspepsia,  and  that  he  was  only  a 
second-class  risk.  The  company  had  full  notice  that  he  was  not  in 
first-class  health,  because  the  insured  himself  stated  in  his  application 
that  he  had  dyspepsia,  and  had  had  malaria,  and  had  applied  for  a  pen- 
sion on  the  ground  of  indigestion  brought  on  by  exposure  in  the  army. 
Besides,  the  incontestable  clause  would  seem  to  effectually  bar  this 
defense.  If  this  clause  be  not  altogether  a  glittering  generality,  put 
in  for  no  purpose  except  to  induce  men  to  insure,  it  would  seem  that 
it  must  cover  such  misstatements  or  omissions  as  are  here  alleged. 
Such  clauses  have  been  upheld  by  various  courts.  Wright  v.  Mut. 
B.L.  Asso.,  118  N.Y.  237;  Simpson  v.  Life  Ins.  Co.,  115  N.C.  39. 
Goodwin  v.  Provident  S.L.  Ass.  Asso.,  97  Iowa  226;  Kline  v.  Nat.  B. 
Asso.,  in  Ind.  462.  We  see  no  reason  why  an  insurance  company 


102  LAW  AND  BUSINESS 

may  not  take  the  risk  of  ascertaining  for  itself  the  condition  of  health 
of  the  insured. 

Judgment  affirmed. 
QUESTIONS 

1.  Suppose  that  the  policy  in  this  case,  had  been  payable  to  the  estate  of 
the  insured  person,  what  would  have  been  the  decision  of  the  court  in  an 
action  by  the  insured's  personal  representative  on  the  policy? 

2.  D  insures  X's  life,  promising  to  pay  W,  his  wife,  $5,000,  at  X's  death. 
-Six  months  later,  X,  while  sane,  commits  suicide.    W  sues  for   the 

loss  under  the  policy.    What  decision? 

3.  X,  badly  in  debt,  insures  his  life  in  six  different  companies,  in  favor  of  his 
wife  and  children,  in  amounts  aggregating  $50,000.    Within  a  month 
after  effecting  this  insurance,  X  commits  suicide.    This  is  an  action  by 
W  on  the  policy  issued  by  D.    What  decision  ? 

4.  D  issues  a  policy  on  the  life  of  X,  which  provides  that  no  recovery  can 
be  had  on  it  if  the  insured  takes  his  own  life.    X,  in  a  fit  of  insanity,  kills 
himself.    What  decision  in  an  action  on  the  policy  by  X's  personal 
representative  ? 

5.  The  policy  in  the  foregoing  case  provides  that  no  recovery  can  be  had  on 
it  in  case  the  insured  takes  his  own  life,  sane  or  insane.    X  accidentally 
shoots  himself  while  hunting.    What  decision  in  an  action  on  the  policy  ? 

6.  In  the  foregoing  case,  X,  hopelessly  insane,  commits  suicide.    What 
decision  in  an  action  on  the  policy  by  X's  personal  representative  ? 

7.  What  is  meant  by  the  "incontestable  clause,"  referred  to  in  this  case? 
WTiat  is  the  purpose  of  it  ?    Why  do  insurance  companies  incorporate 
it  into  their  policies  ?    What  is  its  effect  on  defenses  which  the  company 
may  have  to  actions  on  the  policy  ? 

II)     Warranties 
ALABAMA  LIFE  INSURANCE  COMPANY  v.  JOHNSTON 

80  Alabama  Reports  467  (1886) 

SOMERVILLE,  J.  The  question  of  most  importance,  which  is 
raised  by  the  rulings  of  the  court  in  this  case,  is,  whether  the  answers 
made  by  the  assured  to  the  questions  contained  in  the  application 
for  insurance  are  to  be  construed  as  absolute  warranties,  or  in  the 
nature  of  mere  representations. 

The  distinction  between  a  warranty  and  a  representation  in 
insurance  is  frequently  a  question  of  difficulty,  especially  in  the 
light  of  more  recent  decisions,  which  recognize  the  subject  as  one  of 
growing  importance  in  its  relations  particularly  to  life  insurance. 
As  a  general  rule,  it  has  been  laid  down  that  a  warranty  must  be  a 


DEVICES  FOR  SHIFTING  RISKS  103 

part  and  parcel  of  the  contract  of  insurance,  so  as  to  appear,  as  it 
were,  upon  the  face  of  the  policy  itself,  and  is  in  the  nature  of  a 
condition  precedent.  It  may  be  affirmative  of  some  fact,  or  only 
promissory.  It  must  be  strictly  complied  with,  or  literally  fulfilled,' 
before  the  assured  is  entitled  to  recover  on  the  policy.  It  need  not 
be  material  to  the  risk,  for  whether  material  or  not,  its  falsity  or 
untruth  will  bar  the  assured  of  any  recovery  on  the  contract,  because 
the  warranty  itself  is  an  implied  stipulation  that  the  thing  warranted 
is  material.  It  further  differs  from  a  representation  in  creating  on 
the  part  of  the  assured  an  absolute  liability  whether  made  in  good 
faith  or  not. 

A  representation  is  not,  strictly  speaking,  a  part  of  the  contract  of 
insurance,  or  of  the  essence  of  it,  but  rather  something  collateral  or 
preliminary,  and  in  the  nature  of  an  inducement  to  it.  A  false 
representation,  unlike  a  false  warranty,  will  not  operate  to  vitiate 
the  contract,  or  avoid  the  policy,  unless  it  relates  to  a  fact  actually 
material,  or  clearly  intended  to  be  made  material  by  the  agreement 
of  the  parties.  It  is  sufficient  if  representations  be  substantially 
true.  They  need  not  be  strictly  or  literally  so.  A  misrepresenta- 
tion renders  the  policy  void  on  the  ground  of  fraud;  while  a  non- 
compliance  with  a  warranty  operates  as  an  express  breach  of  the 
contract. 

The  mere  fact  that  a  statement  is  referred  to,  or  even  inserted  in 
the  policy  itself,  so  as  to  appear  on  its  face,  is  not  alone  now  con- 
sidered as  conclusive  of  its  nature  as  a  warranty,  although  it  was 
formerly  considered  otherwise.  Whether  such  statement  shall  be 
construed  as  a  warranty  or  a  representation  depends  rather  upon  the 
form  of  expression  used,  the  apparent  purpose  of  the  insertion,  and  its 
connection  or  relation  to  other  parts  of  the  application  and  policy, 
construed  together  as  a  whole,  where  legally  these  papers  constitute 
one  entire  contract,  as  they  must  frequently  do.  Bliss  on  Insurance, 
sec.  43,  et  seq.,  Price  v.  Phoenix  Mut.  Ins.  Co.  (17  Minn.  497). 

In  construing  contracts  of  insurance  there  are  some  settled  rules  of 
construction  bearing  on  this  subject,  which  we  may  briefly  formulate 
as  follows: 

1)  The  courts  being  strongly  inclined  againstf  orfeitures,  will  con- 
strue all  the  conditions  of  the  contract,  and  the  obligations  imposed, 
liberally  in  favor  of  the  assured,  and  strictly  against  the  insurer. 

2)  It  requires  the  clearest  and  most  unequivocal  language  to 
create  a  warranty,  and  every  statement  or  engagement  of  the  assured 


104  LAW  AND  BUSINESS 

will  be  construed  to  be  a  representation  and  not  a  warranty,  if  it  be 
at  all  doubtful  in  meaning,  or  the  contract  contains  contradictory 
provisions  relating  to  the  subject,  or  be  otherwise  reasonably  sus- 
ceptible of  such  construction.  The  courts,  in  other  words,  will  lean 
against  the  construction  of  the  contract,  which  will  impose  upon  the 
insured  the  burdens  of  a  warranty,  and  will  neither  create  nor  extend  a 
warranty  by  construction. 

3)  Even  though  a  warranty,  in  name  or  form,  be  created  by  the 
terms  of  the  contract,  its  effect  may  be  modified  by  other  parts  of  the 
policy  or  of  the  application,  including  the  questions  and  answers, 
so  that  the  answers  of  the  assured,  so  often  merely  categorical, 
will  be  construed  not  to  be  a  warranty  of  immaterial  facts,  stated  in 
such  answers,  but  rather  a  warranty  of  the  assured's  honest  belief  in 
their  truth — or,  in  other  words,  that  they  were  stated  in  good  faith. 
The  strong  inclination  of  the  courts  is  thus  to  make  these  statements 
or  answers,  binding  only  so  far  as  they  are  material  to  the  risk,  where 
this  can  be  done  without  doing  violence  to  the  clear  intention  of  the 
parties  expressed  in  unequivocal  and  unqualified  language  to  the 
contrary. 

Many  early  adjudications  may  be  found,  and  not  a  few  recent 
ones  also,  in  which  contracts  of  insurance,  and  especially  of  life 
insurance,  have  been  construed  in  such  a  manner  as  to  operate  with 
great  harshness  and  injustice  to  policyholders,  who,  acting  with  all 
proper  prudence,  as  remarked  by  LORD  ST.  LEONARDS,  in  the  case  of 
Anderson  v.  Fitzgerald  4  H.L.C.  507,  had  been  "led  to  suppose  that 
they  had  made  a  provision  for  their  families  by  an  insurance  on  their 
lives,  when,  in  point  of  fact,  the  policy  was  not  worth  the  paper  on 
which  it  is  written."  The  rapid  growth  of  the  business  of  life  insur- 
ance in  the  past  quarter  of  a  century,  with  the  tendency  of  insurers 
to  exact  increasingly  rigid  and  technical  conditions,  and  the  evils 
resulting  from  an  abuse  of  the  whole  system,  justify,  if  they  do  not 
necessitate,  a  departure  from  the  rigidity  of  our  earlier  jurisprudence 
on  this  subject  of  warranties.  And  such,  as  we  have  said,  is  the  tend- 
ency of  the  more  modern  authorities. 

QUESTIONS 

1.  What  is  the  difference  between  a  warranty  and  a  representation  ? 

2.  What  is  meant  when  it  is  said  that  a  warranty  is  "in  the  nature  of  a 
condition  precedent"  ? 


DEVICES  FOR  SHIFTING  RISKS  tO$ 

3.  What  is  the  effect  of  a  misrepresentation  of  an  immaterial  fact?    What 
is  the  effect  of  a  non-compliance  with  a  warranty  concerning  an  imma- 
terial fact  ? 

4.  What  is  the  effect  of  a  breach  of  warranty  made  in  good  faith  by  the 
insured  ? 

5.  What  is  the  test  for  determining  whether  a  given  statement  is  a  warranty 
or  a  mere  representation  ?    Is  every  statement  made  by  the  insured  in 
the  policy  itself  a  warranty  ?    Will  a  statement  made  in  the  application 
for  insurance  be  construed  to  be  a  warranty? 

6.  The  court  says  in  this  case  that  all  statements  will  be  construed  liberally 
in  favor  of  the  insured.    What  is  the  justification  for  this  rule  of  con- 
struction ? 

7.  X  insured  his  life  with  the  D  Company.    In  the  policy  it  was  stated  that 
all  answers  in  the  application  "are  deemed  material  and  are  incorporated 
herein  as  a  part  of  this  contract."    One  question  asked  of  the  applicant 
was:    "Have  you  ever  sustained  a  serious  injury  ? "    The  answer  was  in 
the  negative.    In  an  action  on  the  policy,  the  company  offered  evidence, 
tending  to  prove  that  X,  while  a  child,  fell  out  of  a  cherry  tree  and 
sustained  a  serious  injury  therefrom.     Should  the  evidence  be  admitted  ? 

8.  In  the  foregoing  case,  another  question  was:  "Have  you  ever  had  medical 
attention?    If  so,  when?"    X,  innocently  but  erroneously,  answered 
in  the  negative.    In  an  action  on  the  policy,  the  company  assigned 
this  misstatement  as  a  breach  of  warranty.    What  decision? 

FOWLER  v.  AETNA  INSURANCE  COMPANY 
6  Cowen's  New  York  Reports  673  (1827) 

Assumpsit,  on  a  policy  of  insurance  against  fire;  tried  at  the  New 
York  circuit,  July  6,  1826,  before  EDWARDS,  J. 

The  plaintiffs,  at  the  trial,  proved  a  policy  executed  by  the 
defendants,  on  the  stock  in  trade  of  the  plaintiffs,  contained  in  a  two- 
story  frame  house,  filled  in  with  brick,  situated  at  No.  152  Chatham 
Street,  in  the  city  of  New  York.  It  appeared  that  the  house,  No.  152 
Chatham  Street,  was  burned,  with  the  plaintiffs'  stock  in  trade; 
but  that  the  house  was  a  wooden  building,  with  hollow  walls  and  not 
filled  in  with  brick.  That  one  of  the  conditions  attached  to  the  policy 
was,  that  if  any  person  insuring  any  building  or  goods  at  the  Aetna 
Office,  should  describe  the  same  otherwise  than  as  they  really  were, 
so  that  the  same  might  be  insured  at  less  than  the  rate  of  premium 
specified  in  the  printed  proposals  of  the  company,  such  insurance 
should  be  void  and  of  no  effect.  Evidence  was  given  at  the  trial, 
on  the  question  whether  the  plaintiffs  have  been  guilty  of  fraud  in  pro- 


106  LAW  AND  BUSINESS 

curing  an  over  valuation  of  the  goods  destroyed;  and  among  other 
evidence,  the  judge  allowed  proof  on  the  part  of  the  plaintiffs  of  their 
good  character.  This  was  objected  to,  and  made  one  point  of  ex- 
ception by  the  defendants. 

The  defendants  insisted  that  the  description  of  the  goods,  as  being 
in  a  house  filled  in  with  brick,  was  a  warranty  which  must  be  strictly 
complied  with.  The  judge  so  considered  it;  but  he  received  evidence 
to  show  that  the  wrong  description  was  either  a  mistake  of  the  plain- 
tiffs, or  of  the  agent  of  the  defendants;  and  charged  the  jury,  that 
if  the  plaintiffs  made  no  representation  of  the  character  of  the  property 
insured,  but  the  agent  of  the  company  took  it  upon  himself  to  describe 
it,  the  plaintiffs  were  not  bound  to  answer  for  the  error.  That  if  the 
plaintiffs  did  make  the  description,  but  not  fraudulently,  for  the 
purpose  of  getting  insurance  at  a  reduced  rate,  but  through  mistake, 
still  they  were  entitled  to  recover.  The  defendants'  counsel  excepted 
to  the  decisions  and  charge  of  the  judge.  There  was  a  verdict  for 
the  plaintiffs  for  $3,042.80. 

SAVAGE,  C.  J.  I  think  it  very  immaterial  as  regards  this  action 
whether  the  error  in  description  arose  from  design  or  mistake.  The 
question  is,  did  this  description  amount  to  a  warranty  that  the 
property  answered  the  description?  The  judge  at  the  circuit  so 
considered  it;  and  it  was  admitted  on  the  argument,  that  if  the 
principles  of  marine  insurance  are  applicable  to  fire  insurance,  it  is  a 
warranty.  In  the  case  of  Stetson  v.  Mass.  Mutual  Fire  Ins.  Co. 
(4  Mass.  Rep.  337)  SEWALL,  J.,  lays  down  the  law  thus:  "The 
estimate  of  the  risk  undertaken  by  an  insurer  must  generally  depend 
upon  the  description  of  it  made  by  the  insured  or  his  agent.  A 
mistake  or  omission  in  his  representation  of  the  risk,  whether  wilful 
or  accidental,  if  material  to  the  risk  insured,  avoids  the  contract." 
Gates  v.  Madison  Mutual  Ins.  Co.,  3  Barb.  S.C.  Rep.  73;  Frost  v. 
Saratoga  Mutual  Ins.  Co.,  5  Den.  154;  Gates  v.  Madison  Mutual  Ins. 
Co.,  2  Comst.  R.  43.  For  this,  he  cites  i  Marsh,  on  Insurance  335, 
339.  That  writer  states  that  a  warranty  being  in  the  nature  of  a 
condition  precedent,  must  be  fulfilled  by  the  insured,  before  per- 
formance can  be  enforced  against  the  insurer;  and  whether  the 
thing  warranted  was  material  or  not,  whether  the  breach  of  it  pro- 
ceeded from  fraud,  negligence,  misinformation,  or  any  other  cause, 
the  consequence  is  the  same,  i  Marsh.  347. 

In  relation  to  the  sale  of  personal  property,  it  is  held  that  a  bill 
of  parcels  is  not  a  warranty  that  the  goods  are  what  they  are  repre- 


DEVICES  FOR  SHIFTING  RISKS  107 

sented  to  be.  2  Caines,  48,  and  other  cases  down  to  the  20  John.  198. 
But  in  relation  to  policies  of  insurance,  it  is  held  that  a  description  of 
a  vessel  is  a  warranty.  For  instance,  the  description  of  a  vessel  as 
Swedish  is  a  warranty  of  her  national  character.  Phil,  on  Insurance 
125,  and  the  cases  there  cited.  8  John.  237,  319. 

No  cases  have  been  produced,  to  show  that  a  description  of 
property  insured  by  a  policy  against  fire,  is  to  be  construed  differ- 
ently from  a  description  in  a  marine  policy.  I  can  perceive  no 
reason  why  there  should  be  a  difference.  "Insurance,"  says  Lord 
Mansfield,  "is  a  contract  upon  speculation."  3  Burr.  1909.  "The 
special  facts  upon  which  the  contingent  chance  is  to  be  computed, 
lie  most  commonly  in  the  knowledge  of  the  insured  only;  the  under- 
writer trusts  to  his  representation,"  etc.  He  says  the  insured  need 
not  state  what  the  insurer  knows;  but  the  keeping  back  the  true 
state  of  the  property  is  a  fraud. 

In  this  case,  the  plaintiffs  ought  to  have  known  the  true  state  and 
condition  of  their  house  and  have  truly  represented  it.  Not  having 
done  so,  they  fail  in  their  action.  The  property  burned  is  not  the 
property  insured. 

This  is  not  a  case  in  which  equities  should  be  considered.  It  is  a 
sort  of  gambling,  a  speculation  upon  chances;  and  the  parties  must 
be  held  strictly  and  literally  to  their  contract. 

I  think  the  judge  misdirected  the  jury  and  that  a  new  trial  should 
be  granted. 


QUESTIONS 

1.  What  was  the  error  committed  by  the  lower  court  in  its  instructions  to  the 
jury  ?    What  instructions  should  have  been  given  to  the  jury  under  the 
facts  of  this  case  ? 

2.  What  is  the  effect  of  a  breach  of  warranty  by  the  insured?    How  does 
the  insurer  take  advantage  of  a  .breach  of  warranty  on  the  part  of  the 
insured  ? 

3.  D  issued  a  policy  to  P,  insuring  "stock  contained  in  a  brick  building, 
with  a  tin  roof,  occupied  as  a  storehouse."    P  sues  for  a  loss  under  the 
policy.    D  pleads  a  breach  of  warranty  and  proves  that  at  the  time  the 
policy  was  issued  the  building  was  only  partly  occupied  as  a  storehouse. 
What  decision  ? 

4.  D  issued  a  policy  of  insurance  to  P  on  a  building  described  as  a  "machine 
shop."    As  a  matter  of  fact,  the  building  was  a  barber  shop.    What 
decision  in  an  action  by  P  on  the  policy  ? 


io8  LAW  AND  BUSINESS 

5.  This  was  an  action  on  an  insurance  policy.  The  defense  was  a  breach 
of  warranty.  In  the  application,  made  a  part  of  the  contract,  P  stated: 
"A  watchman  is  kept  on  the  premises."  D  proved  that  the  watchman 
was  not  there  regularly  and  that  he  was  absent  on  the  night  of  the  fire. 
What  decision  ? 

SMITH  v.  MECHANICS'  FIRE  INSURANCE  COMPANY  . 
32  New  York  Reports  399  (1865) 

'  DAVIS,  J.  This  action  is  brought  on  a  policy  of  insurance  of 
$2,500,  issued  by  defendants  to  Alexander  Smith,  and  by  him  duly 
assigned  to  plaintiff.  The  policy  was  upon  one  of  several  buildings 
adjoining  or  contiguous,  and  constituting  an  establishment  known 
as  " Smith's  Carpet  Factory."  The  risk  came  under  the  class  of 
special  hazards,  and  the  premium  was  at  the  rates  charged  for  that 
class.  The  property  insured  is  described  in  the  policy  in  these  words: 
"$400  on  his  two  story  frame  building  used  for  winding  and  coloring 
yarn  and  for  storage  of  spun  yarn,  situated  at  West  Farms,  West- 
chester  county,  New  York,  known  as  part  of  Smith's  Carpet  Factory, 
marked  F  on  plan  of  premises  filed  in  the  office  of  the  Brooklyn 
Fire  Insurance  Company;  $1,600  on  stock  wrought  and  unwrought 
and  in  process  of  being  wrought  in  the  above  building;  $500  on 
machinery  and  fixtures  in  said  building." 

The  policy  also  contained  a  clause  in  these  words:  "And  it  is 
agreed  and  declared  to  be  the  true  intent  and  meaning  of  the  parties 
hereto,  that  in  case  the  above-mentioned  premises  shall,  at  any  time 
after  the  making  and  during  the  time  this  policy  would  otherwise  be 
in  force,  be  appropriated,  applied,  or  used  to,  or  for  the  purpose  of, 
carrying  on  or  exercising  therein  any  trade,  business,  or  vocation 
denominated  hazardous,  or  extra-hazardous,  or  specified  in  the 
memorandum  of  special  rates  in  the  terms  and  conditions  annexed 
to  this  policy,  or  for  the  purposes  either  of  depositing,  storing,  or 
keeping  therein  any  of  the  articles,  goods,  or  merchandise  in  the 
same  terms  or  conditions  denominated  hazardous,  or  extra-hazardous, 
or  included  in  the  memorandum  of  special  rates,  except  as  herein 
expressly  provided  for,  or  hereafter  agreed  to  by  this  corporation,  in 
writing,  to  be  added  to,  or  indorsed  upon  this  policy,  then  and  from 
thenceforth  so  long  as  the  same  shall  be  appropriated,  applied  or 
used,  these  presents  shall  cease  and  be  of  no  force  or  effect." 

Among  the  subjects  enumerated  in  the  memorandum  of  special 
rates  contained  in  the  conditions  annexed  to  said  policy  are  "wool 


DEVICES  FOR  SHIFTING  RISKS  log 

mills,  wheelwrights,  and  wool  waste,  and  generally  all  mills  and  manu- 
facturing establishments  requiring  the  use  of  fire  heat  not  before 
enumerated." 

In  October,  1861,  the  manufacture  of  carpets  having  been  tempo-" 
rarily  suspended  under  the  pressure  of  the  times,  the  insured  placed 
in  the  building  covered  by  the  policy  in  suit,  thirteen  hand  looms 
for  weaving  woolen  army  blankets,  which  looms  were  in  part  made 
from  materials  before  used  in  manufacturing  carpets,  and  partly  from 
new  materials.  On  the  first  of  November,  1861,  defendant,  for  an 
additional  premium  at  an  enhanced  rate,  consented  that  building  "  C," 
one  of  the  several  constituting  the  carpet  factory,  be  occupied  for 
weaving,  fulling,  and  storage  purposes,  and  gave  privilege  "to  run 
the  mill  nights  for  the  term  of  three  months." 

After  this  period  the  insured  commenced  weaving  army  blankets 
by  hand  power  in  the  building  insured  by  defendants,  and  continued 
that  business  until  the  whole  establishment  was  destroyed  by  a  fire, 
which  occurred  in  January,  1862,  and  originated  in  another  building. 
There  was  no  evidence  that  the  change  in  the  use  of  the  building 
increased  the  risk,  and  plaintiff  offered  to  show  that  the  risk  was, 
in  fact,  decreased,  but  the  evidence  offered  was  excluded.  It  was 
proved  that  the  process  of  "fulling"  was  never  used  in  the  manu- 
facturing of  carpets,  but  was  a  necessary  part  of  the  manufacture  of 
blankets,  and  that  it  was  not  customary  for  carpet  factories  to  be 
run  nights.  On  the  trial  the  plaintiff  was  nonsuited,  and  judgment 
entered  thereon  was  affirmed  at  General  Term.  . 

The  statement  of  the  policy  that  the  building  insured  was  "used 
for  windings  and  coloring  yarn  and,  for  storage  of  spun  yarn"  was 
undoubtedly  a  warranty  of  its  then  present  use.  (Jenkins  v.  Chenango 
Mutual  Ins,  Co.,  2  Denio,  75;  Wall  v.  The  East  River  Ins.  Co.,  3  Seld. 
3  70.)  This  is  all  that  is  settled  by  the  foregoing  cases.  But  there  is  no 
pretense  that  the  building  in  this  case  was  not  used  at  the  time  of  the 
insurance  precisely  as  stated,  and  therefore,  none  for  saying  that 
the  warranty  was  broken  in  presenti,  as  it  was  in  the  case  cited.  The 
only  question,  therefore,  on  this  part  of  the  policy,  is  whether  it  con- 
tains a  warranty  that  the  building,  during  the  continuance  of  the 
policy,  should  be  used  only  "for  winding,  coloring,  and  storing  yarn, 
with  the  fixtures  and  machinery  then  in  it."  In  O'Neil  v.  The 
Buffalo  Ins.  Co.,  the  premises  were  described  as  occupied  by  a 
certain  individual  as  a  private  dwelling.  The  occupant  moved  from 
and  ceased  to  occupy  the  house  several  weeks  before  the  fire,  and  it 


HO  LAW  AND  BUSINESS 

stood  vacant  when  burned.  This  court  held  that  the  description 
in  the  policy  must  be  regarded  as  a  warranty  of  the  fact  that  the 
person  named  was  the  occupant  at  the  date  of  the  policy,  and  nothing 
more.  (3  Comstock,  122.)  In  Catlin  v.  The  Springfield  Ins.  Co. 
(i  Sum.  435)  the  policy  was  on  a  dwelling-house  "at  present  occupied 
by  one  Joel  Rogers  as  a  dwelling  house,  but  to  be  occupied  thereafter 
as  a  tavern,  and  privileged  as  such,"  it  was  held  that  there  was 
no  continuing  warranty  that  the  house  should  be  occupied  as  a 
tavern  or  otherwise,  and  that  the  company  were  liable,  although  the 
building  was  destroyed  while  vacant,  by  foul  means,  which  probably 
could  not  have  occurred  if  it  had  been  occupied.  A  distinction  was 
made  in  the  court  below  between  the  use  of  the  word  "occupied"  and 
the  word  "used"  in  the  description  of  policy  as  to  the  effect  upon  the 
question  of  continuing  warranty;  but  to  my  mind  the  suggestion  is 
without  force.  Both  relate  to  the  present  actual  use  of  the  property, 
and  are,  when  so  applied,  synonymous  in  intent  and  meaning.  If 
the  courts  do  not  find  a  warranty  in  the  phrase  occupied  in  a  particu- 
lar manner,  it  would  be  overstraining  to  find  one  in  the  words,  used 
in  a  specified  way.  If  an  insurance  company  desire  to  protect  itself  by 
a  warranty  as  to  future  or  continued  use  in  the  same  manner  as  when 
insured,  it  may  always  do  so  by  language,  the  object  and  meaning  of 
which  will  be  understood  by  both  parties,  and  the  court  should  not  thus 
construe  words  which  are  fully  satisfied  as  a  description  of  a  present  use 
or  condition,  into  a  promissory  warranty,  unless  the  inference  is  natural 
and  irresistible  that  such  was  the  understanding  and  design  of  both 
parties.  Where  there  is  such  a  warranty  as  to  future  use,  the  desig- 
nated use  must  continue,  or  the  warranty  will  be  broken,  for  courts 
have  no  right  to  say  that  the  insured  may  abandon  the  particular 
use  or  occupancy,  and  allow  the  premises  to  lie  vacant  or  idle;  for  the 
very  act  of  requiring  such  a  warranty  is  conclusive  that  the  insurer 
considered  the  continuance  of  the  designated  use  or  occupancy 
material  to  the  risk,  and  made  the  contract  accordingly.  In  my 
opinion  there  was  no  continuing  warranty  of  future  use  in  the  clause 
of  the  policy  under  consideration. 

QUESTIONS 

1.  How  could  the  insurance  company;  in  this  case,  have  protected  itself 
against  a  change  in  the  use  of  the  insured  building  ? 

2.  D  issued  a  policy  on  a  building  "occupied  as  a  dwelling-house."    The 
building  became  vacant  and  three  weeks  later  was  consumed  by  fire. 
This  is  an  action  by  the  insured  on  the  policy.    What  decision  ? 


DEVICES  FOR  SHIFTING  RISKS  III 

3.  The  D  Company  issued  a  policy  of  insurance  on  P's  plant.    It  was 
stated  in  the  policy  that  a  night  watchman  would  be  kept  on  the  premises. 
When  the  building  burned  there  was  no  watchman  on  the  premises. 
What  decision  in  an  action  by  P  against  D  on  the  policy  ? 

4.  P's  policy  contained  this  statement:    "Smoking  is  not  allowed  on  the 
insured  premises."    Smoking  on  the  premises  was  forbidden  by  P  but 
was  occasionally  indulged  in  by  employees  in  violation  of  orders.     Six 
months  later  there  was  a  fire  caused  by  the  smoking  of  the  night  watch- 
man.   What  decision  in  an  action  by  P  on  the  policy? 

5.  Are  statements  contained  in  an  application  for  insurance  warranties? 
Can  they  be  made  warranties  ?    If  so,  how  ? 

Ill)     Conditions 

FAUST  v.  AMERICAN  FIRE  INSURANCE  COMPANY 

91  Wisconsin  Reports  158  (1895) 

MARSHALL,  J.  The  main  question  presented  on  this  appeal  is 
whether  the  presence  of  a  small  amount  of  benzine  on  the  premises 
for  use  in  the  repair  shop  rendered  the  contract  of  insurance  void. 
Keeping  in  mind  the  undisputed  evidence  that  the  prohibited  article 
was  not  kept  as  an  article  of  merchandise  for  sale,  but  as  an  article 
usually  and  necessarily  kept  in  operating  the  business  of  the  repair 
department  of  the  furniture  store,  which  the  policy  expressly  covered, 
we  find  abundant  authority  to  support  the  general  rule,  which  we 
adopt,  that  where  a  contract  of  insurance  by  the  written  portion 
covers  property  to  be  used  in  conducting  a  particular  business,  the 
keeping  of  an  article  necessarily  used  in  such  business  will  not  void 
the  policy,  even  though  expressly  prohibited  in  the  printed  conditions 
of  the  contract. 

It  must  be  recognized  that  there  is  some  conflict  in  the  authorities 
on  this  subject,  but  the  great  weight  of  authority  fully  sustains  the 
rule  as  above  stated. 

In  the  light  of  the  foregoing,  obviously  the  contract  of  insurance 
which  covered  the  building  to  be  used  as  a  repair  shop  in  connection 
with  the  furniture  store  permitted  all  things  necessary  to  the  enjoy- 
ment of  the  property  for  such  use.  The  clause  in  the  written  portion 
of  the  policy,  "four  hundred  dollars  on  the  stock  of  furniture,  uphol- 
stery goods,  and  other  merchandise,  not  more  hazardous,  usual  to  a 
retail  furniture  store,"  must  be  construed  to  cover  merchandise  kept 
in  the  trade  in  the  furniture  store,  and  the  words  "not  more  hazardous" 
to  refer  to  such  merchandise  only  and  have  no  reference  to  the  neces- 


112  LAW  AND  BUSINESS 

sary  articles  kept  for  use  in  the  repair  shop.  The  words  "any  usage 
or  custom  of  trade  or  manufacture  to  the  contrary  notwithstanding " 
contained  in  the  printed  portion  of  the  policy,  so  far  as  they  would 
otherwise  prohibit  the  necessary  use  of  benzine  in  the  repair  shop, 
must  be  held  to  be  controlled  by  the  written  portion  of  the  policy, 
which  expressly  insures  the  building  in  part  as  a  repair  shop,  this  upon 
the  presumption  that  must  exist,  that  the  parties  intended  that  the 
repair  shop  as  it  was,  and  as  it  must  necessarily  continue  to  be  if  it 
continued  at  all,  must  be  carried  on  with  all  usual  and  necessary 
incidents,  and  that  as  such  it  was  protected  by  the  contract  of  insur- 
ance; also  by  force  of  the  well-established  rule,  that  the  written 
special  description  of  the  particular  subject-matter,  wherever  incon- 
sistent with  the  printed  clauses  of  the  policy,  must  control.  Citizens' 
Insurance  Co.  v.  McLaughlin,  53  Pa.  St.  485;  Cushman  v.  N.W. 
Insurance  Co.,  34  Me.  487;  Archer  v.  Merchants'  6°  M.  Insurance  Co., 
43  Mo.  434.  The  construction  we  thus  give  the  policy  renders  the 
contract  just  and  reasonable,  and  carries  out  the  obvious  intention  of 
the  parties  to  it.  Any  other  construction  would  lead  to  the  absurd 
result  that  the  prohibitory  clause  of  the  policy  would  absolutely 
prevent  the  carrying  on  of  the  business  expressly  permitted  in  the 
written  portion.  No  such  absurdity  can  be  held  to  have  been  con- 
templated by  the  parties,  unless  the  terms  of  the  contract  are  such  as 
not  to  permit  of  any  other  reasonable  construction.  As  said  in  Carlin 
v.  Western  Assurance  Co.,  57  Md.  515:  "Where  the  contrary  is  not 
expressly  made  to  appear,  it  is  not  to  be  presumed  that  when  an 
insurance  is  effected  with  reference  to  an  established  and  current 
business,  whose  protection  is  really  the  object  of  the  insurance,  such 
a  narrow  and  stringent  construction  of  the  provisions  of  the  policy 
was  intended  as  will  necessarily  cause  its  serious  embarrassment  or 
suspension." 

It  follows  from  the  foregoing  that  the  judgment  of  the  Circuit 
Court  must  be  reversed  and  a  new  trial  granted. 

QUESTIONS 

1.  How  could  the  insurer  in  the  principal  case  have  escaped  the  risk  in 
question  ?    Does  the  court's  conclusion  seem,  on  the  whole,  fair  to  the 
insurer  ? 

2.  D  insured  P's  building.     The  policy  contained  a  provision  that  in  case 
the   insured    should  store  or  keep  gasoline  or  other  extra-hazardous 
substances  on  the  premises  the  policy  should  be  void.    P  kept  gasoline 


DEVICES  FOR  SHIFTING  RISKS  113 

in  the  building  for  sale.  The  building  caught  fire  from  a  defective  flue 
and  burned.  P  sues  for  the  loss.  D  sets  up  a  breach  of  condition. 
What  decision  ? 

3.  D  issued  a  policy  to  P,  containing  this  clause:    "If  the  insured  shall- 
keep  or  use  naphtha  in  the  cotton  mill  without  the  consent  of  the  com- 
pany, this  policy  shall  be  void."     P  carried  a  small  quantity  of  naphtha 
into  the  mill  with  which  to  exterminate  some  insects  in  the  cotton. 
P  sues  for  a  loss  under  the  policy.    What  decision  ? 

4.  D  issued  a  policy  to  P  "on  his  stock  in  trade,  usually  kept  in  a  country 
store."    There  was  a  printed  clause  in  the  policy  excepting  gunpowder 
and  naphtha  from  the  risks  assumed  by  the  insurer.     P  kept  a  supply  of 
each  article  on  hand,  as  such  things  were  usually  carried  by  country 
stores.    P    sues   on   the   policy.    D    pleads    a    breach    of    condition. 
What  decision  ? 

5.  P  effects  insurance  on  whiskey  which  he  keeps  for  sale  in  violation  of 
law.    P  sues  for  a  loss  under  the  policy.    What  decision  ? 

6.  The  standard  policy  contains  a  provision  avoiding  the  policy  in  case  it 
is  assigned  before  loss  without  the  consent  of  the  company.    What  is 
the  purpose  of  this  provision  ? 

ANGIER  v.  WESTERN  ASSURANCE  COMPANY 
10  South  Dakota  Reports  82  (1897) 

Action  upon  a  policy  of  fire  insurance.  Plaintiff  had  judgment, 
from  which,  and  from  an  order  denying  its  motion  for  a  new  trial, 
defendant  appeals.  Affirmed. 

CORSON,  P.  J.  The  second  defense  is  based  upon  the  following 
stipulation  in  the  policy:  "This  entire  policy  shall  be  void  if  the 
hazard  be  increased  by  any  means  within  the  control  or  knowledge 
of  the  insured,  or  if  (any  usage  or  custom  of  trade  or  manufacture  to 
the  contrary  notwithstanding)  there  be  kept,  used  or  allowed  on  the 
above  described  premises,  phosphorus,  petroleum,  or  any  of  its  prod- 
ucts of  greater  inflammability  than  kerosene  oil  of  the  United  States 
standard  (which  last  may  be  kept  for  light,  and  kept  for  sale  according 
to  the  law,  but  in  quantities  not  exceeding  five  barrels  provided  it 
be  drawn  and  lamps  filled  by  daylight,  or  at  a  distance  not  less  than 
ten  feet  from  artificial  light)."  Comp.  Laws,  sec.  4175,  provides: 
"An  insurer  is  not  liable  for  a  loss  caused  by  the  willful  act  of  the 
insured:  but  he  is  not  exonerated  by  the  negligence  of  the  insured, 
or  of  his  agents  or  others." 

The  facts  in  regard  to  the  origin  of  the  fire  are  thus  stated  by  the 
plaintiff  Stevens  on  cross-examination,  and  are  undisputed:  "I  took 
a  tomato  can,  maybe  two-thirds  or  half-full  of  kerosene  oil,  and  put 


114  LAW  AND  BUSINESS 

some  of  the  oil  on  the  kindling.  I  turned  to  strike  a  match  to  set  it 
afire.  I  had  on  a  pair  of  celluloid  cuffs,  and  the  flame  caught  on  my 
cuffs,  and  in  a  moment  they  blazed  up.  I  had  the  can  in  my  left  hand 
and  it  fell  on  the  floor,  and  the  fire  caught  in  the  stove  at  the  same 
time.  I  rushed  out  and  tried  to  get  my  coat  off." 

As  will  have  been  observed,  there  is  no  clause  in  the  policy  pro- 
hibiting the  plaintiff  from  keeping  kerosene  oil  upon  his  premises  to  the 
extent  of  five  barrels,  United  States  standard,  and  there  is  no  evi- 
dence that  the  oil  used  by  plaintiff  was  below  the  prescribed  standard. 
The  quantity  on  hand  at  the  time  of  the  fire  was  less  than  one  gallon. 
In  view  of  the  stipulation  in  the  policy,  the  provisions  of  the  statute, 
and  the  evidence,  it  is  somewhat  difficult  to  comprehend  the  theory 
of  the  defendant.  It  seems  to  be  contended  that  the  kerosene  oil, 
used  in  the  manner  testified  to  by  the  plaintiff  Stevens,  increased  the 
hazard,  and  therefore  relieved  the  defendant  from  liability.  Un- 
doubtedly, the  use  of  the  kerosene  in  the  manner  detailed  by  the 
witness  was  a  careless  and  negligent  act,  but  it  was  not  such  an  act 
as  is  understood  by  the  term  " increase  of  hazard."  The  stipulation 
of  the  policy  is  that  "the  entire  policy  shall  be  void  if  the  hazard 
be  increased  by  any  means  within  the  control  or  knowledge  of  the 
insured."  Keeping  kerosene  upon  the  premises  in  no  manner  violated 
the  stipulations  of  the  parties,  and  could  not  therefore  be  held  to 
constitute  an  increase  of  the  hazard,  within  the  meaning  of  the 
policy.  The  term  "increase  the  hazard"  denotes  an  alteration  or 
change  in  the  situation  or  condition  of  the  property  insured,  which 
tends  to  increase  the  risk.  These  words  imply  something  of  duration, 
and  a  casual  change  of  a  temporary  character  would  not  ordinarily 
render  the  policy  void,  under  the  stipulations  therein  contained. 
First  Congregational  Church  v.  Holy  ode  Mutual  Fire  Insurance  Co.,  33 
N.E.  572,  158  Mass.  475.  In  that  case  the  Supreme  Court  of  Massa- 
chussetts  held  the  use  of  naphtha  (the  use  or  keeping  of  which  on  the 
insured  premises  was  prohibited  by  the  policy)  for  a  period  of  a  month, 
in  burning  paint  from  the  outside  of  a  wooden  church,  and  causing 
the  burning  of  the  church,  constituted  such  a  change  or  alteration, 
and  was  sufficiently  long  continued  to  be  deemed  a  change  in  the 
situation  or  circumstances  affecting  the  risk.  In  Lyman  v.  Insurance 
Co.,  14  Allen  329,  three  weeks  was  held  sufficient. 

-In  the  case  at  bar  the  contention  of  counsel  for  appellant  that 
the  use  of  kerosene  at  any  one  time,  in  the  manner  detailed,  consti- 
tuted an  increase  in  the  hazard,  in  the  sense  in  which  that  term  is 


DEVICES  FOR  SHIFTING  RISKS  115 

used  in  the  policy,  is  not  tenable.  It,  as  we  have  said,  constituted 
negligence  on  the  part  of  the  plaintiff,  but  did  not  increase  the  hazard 
in  the  sense  that  the  term  is  used  in  the  policies  of  insurance.  But 
as  we  have  seen,  under  the  provisions  of  our  statute,  neither  the  negH- 
gence  of  the  insured  nor  of  his  agents  or  others  exonerates  the  insurer 
from  liability.  (Comp.  Laws,  sec.  4175.)  This  section  of  the  Civil 
Code,  as  appears  from  the  reviser's  notes  to  the  corresponding  pro- 
vision of  the  Code  prepared  for  the  state  of  New  York,  is  based 
largely  upon  Mathews  v.  Insurance  Co.,  n  N.Y.  9;  Gales  v.  Insurance 
Co.,  5  N.Y.  469;  Walker  v.  Maitland,  5  Barn.  &  Aid.  171;  Wafers  v. 
Insurance  Co.,  n  Pet.  213.  In  the  latter  case  the  Supreme  Court 
of  the  United  States,  speaking  by  Mr.  JUSTICE  STORY,  says:  "This 
question  has  undergone  many  discussions  in  the  courts  of  England 
and  America,  and  given  rise  to  opposing  judgments  in  the  two 
countries.  As  applied  to  policies  against  fire  on  land,  the  doctrine 
has  for  a  great  length  of  time  prevailed  that  losses  occasioned  by 
the  mere  fault  or  negligence  of  the  assured  or  his  servants,  un- 
affected by  fraud  or  design,  are  within  the  protection  of  the  policies, 
and,  as  much,  recoverable  from  the  underwriters.  It  is  not  certain 
upon  what  precise  grounds  that  doctrine  was  originally  settled.  It 
may  have  been  from  the  rules  of  interpolation  applied  to  such  policies 
containing  special  exceptions,  and  not  excepting  this;  or  it  may  have 
been,  and  more  probably  was,  founded  upon  a  more  general  ground, 
that,  as  the  terms  of  the  policy  covered  risks  by  fire  generally,  no 
exception  ought  to  be  introduced  by  construction,  except  that  of 
fraud  of  the  assured,  which,  upon  the  principles  of  public  policy  and 
morals,  was  always  to  be  implied.  It  is  probable,  too,  that  the 
consideration  had  great  weight  that  otherwise  such  policies  would 
practically  be  of  little  importance,  since  comparatively  speaking,  few 
losses  of  this  sort  would  occur  which  could  not  be  traced  back  to  some 
carelessness,  neglect,  or  inattention  of  the  members  of  the  family." 
In  Gates  v.  Insurance  Co.,  supra,  the  Court  of  Appeals  of  New  York 
uses  the  following  language:  "But  another  question  arises  upon  the 
evidence  offered,  namely,  whether  a  loss  occurring  from  the  gross 
carelessness  and  negligence  of  the  insured,  his  servants,  or  others,  is 
within  this  policy.  There  can  be  no  doubt  that  one  of  the  objects 
of  insurance  against  fire  is  to  protect  the  insured  from  loss,  as  well 
against  his  own  negligence  as  that  of  his  servants  and  others;  and 
therefore  the  simple  fact  of  negligence  in  either,  however  great  in 
degree,  has  never  been  held  to  be  a  defense  in  such  a  policy." 


n6  LAW  AND  BUSINESS 

The  facts  in  the  case  at  the  bar  were  undisputed,  and  we  think  the 
court  properly  directed  a  verdict  in  favor  of  the  plaintiff.  The  judg- 
ment of  the  Circuit  Court  and  order  denying  a  new  trial  are  affirmed. 

QUESTIONS 

1.  Did  not  the  conduct  of  the  plaintiff  materially  increase  the  hazard 
insured  against  ?     If  so,  why  was  his  conduct  not  held  to  be  a  breach 
of  the  condition  under  consideration  ? 

2.  D  issues  a  policy  to  P,   containing  this  clause:    "If  the  hazard  be 
increased  by  means  within  the  control  or  knowledge  of  the  insured, 
this  policy  shall  be  void."    At  the  time  the  policy  was  issued,  fire 
extinguishers  were  located  in  various  parts  of  the  building.     P  removed 
these  without  the  consent  of  the  company.    P  brings  an  action  for  a 
loss  under  the  policy.    D  contends  that  the  removal  of  the  fire  extin- 
guishers constitutes  a  breach  of  condition.    What  decision  ? 

3.  This  was  an  action  on  a  policy  of  fire  insurance  containing  this  clause: 
"In  case  the  assured  premises  shall  be  vacant  for  more  than  twenty 
days  without  the  consent  of  the  company,  this  policy  shall  be  void." 
P  and  his  family  were  absent   from  the  premises  for  three  weeks 
because  of  the  sickness  and  death  of  a  member  of  the  family  in  a  distant 
city.    The  company  pleads  this  vacancy  as  a  breach  of  condition. 
What  decision  ? 

4.  The  standard  policy  contains  this  provision:  "This  entire  policy,  unless 
otherwise  provided  by  agreement  indorsed  hereon  or  added  hereto, 
shall  be  void  if  the  insured  has  or  shall  hereafter  make  or  procure  any 
other    contract    of    insurance,    whether    valid    or    not,    on    property 
covered  in  whole  or  in  part  by  this  policy."    What  is  the  purpose  of 
this  provision  ? 


DOLLIVER  i).   ST.    JOSEPH   FIRE   INSURANCE    COMPANY 

128  Massachusetts  Reports  315   (1880) 

SOULE,  J.  The  plaintiffs  are  the  assignees  in  bankruptcy  of 
Abraham  Day,  who  being  the  owner  in  fee  of  the  buildings  described 
in  his  policy,  subject  to  certain  mortgages  and  to  a  lease  running  for 
about  three  and  one-half  years,  obtained  the  policy  sued  on;  and, 
the  building  having  been  destroyed  by  fire,  bring  this  action  to 
recover  the  amount  for  which  they  were  insured.  The  plaintiffs 
were  appointed  assignees  after  the  loss.  The  defendant  contended, 
and  the  Chief  Justice  at  the  trial  ruled,  that  the  action  could  jiot  be 
maintained,  because  no  mention  is  made  in  the  policy  of  the  incum- 


DEVICES  FOR  SHIFTING  RISKS  117 

brances  on  the  title  to  the  property  destroyed.  This  ruling  was 
based  on  the  following  provision  of  the  policy:  "4.  If  the  interest  of 
the  assured  in  the  property  be  any  other  than  the  entire,  unconditional, 
and  sole  ownership  of  the  property,  for  the  use  and  benefit  of  the~ 
assured,  or  if  the  building  insured  stands  on  leased  ground,  it  must  be 
so  represented  to  the  company,  and  so  expressed  in  the  written 
part  of  this  policy,  otherwise  the  policy  shall  be  void."  This  provision 
is  in  the  body  of  the  policy,  and  is  inserted  for  the  benefit  of  the  insurer. 
It  is  to  be  construed  strictly  against  it,  and  liberally  in  behalf  of  the 
assured.  If,  therefore,  its  terms  can  be  satisfied  by  a  construction 
which  will  save  the  policy,  and  at  the  same  time  accord  with  the 
established  rules  of  law,  such  construction  must  be  adopted. 

It  has  long  been  settled  in  this  commonwealth,  that,  as  to  all  the 
world  except  the  mortgagee,  a  mortgagor  is  the  owner  of  the  mortgaged 
lands,  at  least  until  the  mortgagee  has  entered  for  possession.  Wil- 
lington  v.  Gale,  7  Mass.  138;  Waltham  Bank  v.  Waltham,  10  Met. 
334;  White  v.  Whitney,  3  Met.  81;  Ewer  v.  Hobbs,  5  Met.  i;  Henry's 
Case,  4  Cush.  257;  Howard  v.  Robinson,  5  Cush.  119;  Bujfum  v. 
Bowditch  Insurance  Co.,  10  Cush.  540;  Farnsworth  v.  Boston,  126 
Mass.  i.  This  being  the  law,  and  the  mortgagees  not  being  in 
possession  of  the  premises,  the  plaintiffs'  assignor  might  well  be 
described  in  a  policy  of  insurance  as  the  owner  of  the  property 
insured;  and,  inasmuch  as  his  estate  was  in  fee  simple,  not  an  estate 
for  life,  and  not  a  base,  qualified,  or  conditional  fee,  it  might  well  be 
described  as  the  entire  and  unconditional  ownership;  and,  as  he  had 
no  joint  tenant  nor  tenant  in  common,  his  estate  was  well  described 
as  the  sole  ownership.  As  between  him  and  the  defendant,  the  mort- 
gages and  the  lease  were  mere  incumbrances  on  his  title,  not  affecting 
its  character  as  entire,  and  not  changing  it  from  an  absolute  to  a 
conditional  estate  or  ownership.  Even  as  between  him  and  the 
mortgagee,  the  mortgagee's  estate  was  the  conditional  one,  deter- 
minable  by  satisfaction  of  the  condition  set  out  in  the  mortgage  deed. 
There  was  no  joint  tenancy  nor  tenancy  in  common  of  the  mortgagor 
and  the  mortgagees.  All  the  characteristics  of  such  tenancies  are 
lacking  in  their  relations  to  the  property. 

The  lease  for  years  created  only  a  chattel  interest  in  the  premises, 
not  affecting  the  ownership  of  the  fee.  It  was  merely  an  incumbrance. 
It  has  been  held  by  the  Supreme  Court  of  the  United  States,  in  a 
recent  case,  that  an  outstanding  lease  did  not  invalidate  a  policy 
in  which  the  ownership  of  the  assured  was  described  as  entire,  uncon- 


Ii8  LAW  AND  BUSINESS 

ditional,  and  sole.  Insurance  Co.  v.  Haven,  95  U.S.  242.  And  we 
do  not  understand  that  the  ruling  in  the  case  at  bar  was  supposed  to 
rest  on  the  existence  of  the  lease. 

On  consideration,  we  are  all  of  opinion  that,  on  the  peculiar 
language  of  the  policy  sued  on,  the  ruling  that  the  interest  of  the 
assured  was  not  sufficiently  expressed  in  the  policy,  and  that  the 
policy  was  therefore  void,  was  erroneous.  The  case  must  therefore 
stand  for  trial. 

QUESTIONS 

1.  Action  by  P  on  a  policy  containing  a  provision  that  the  "policy  shall 
be  void  if  the  insured  is  not  the  sole  and  unconditional  owner  of  the 
property  insured."    The  company  pleads  a  breach  of   condition  and 
shows  that  P  is  only  a  mortgagor  in  possession.    What  decision  ? 

2.  The  company  shows  that  P  is  a  mortgagor  and  that  the  mortgagee  is 
in  possession.    What  decision  ? 

3.  The  company  shows  that  P  is  mortgagee  and  not  in  possession.    What 
decision  ? 

4.  The  company  shows  that  the  property  is  held  by  X  under  a  lease  for 
twenty  years.    What  decision  ? 

5.  The  company  shows  that  P  is  only  an  equitable  owner  and  that  T  holds 
the  legal  title  in  trust  for  him.    What  decision  ? 

6.  The  standard  policy  contains  this  provision:  "If  mechanics  be  employed 
in  the  building,  altering,  or  repairing  the  within  described  premises 
for  more  than  fifteen  days  at  any  one  time  without  the  written  consent 
of  the  company,  this  policy  shall  be  void."    What  is  the  purpose  of 
this  provision  ? 

7.  P  brings  an  action  on  a  policy  containing  the  provision  in  the  fore- 
going question.    The  company  proves  that  P  had  mechanics  engaged 
in  work  on  the  premises,  without  its  permission,  for  more  than  fifteen 
days.    P  offers  to  prove  that  the  fire  in  question  occurred  more  than 
three  weeks  after  the  mechanics  had  finished  their  work.    Should  the 
evidence  be  admitted  ? 

GIBB  v.  PHILADELPHIA  FIRE  INSURANCE  COMPANY 

59  Minnesota  Reports  267  (1894) 

CANTY,  J.  On  February  29,  1892,  the  plaintiff  Gibb  was  the 
owner  in  fee  simple  of  the  premises  in  question,  subject  to  a  mortgage 
of  $1,200,  held  by  the  plaintiff  Hilles.  On  that  day  defendant  issued 
a  policy  of  insurance  insuring  Gibb  to  the  amount  of  $2,000,  for  three 
years  from  and  after  that  day,  against  loss  by  fire  of  the  buildings  on 


DEVICES  FOR  SHIFTING  RISKS  119 

the  premises,  loss,  if  any,  payable  to  Hilles  as  her  interest  may  appear; 
but  providing  that  if,  in  case  of  loss,  the  insurer  is  not  liable  to  the 
mortgagor  or  owner,  it  shall  be  subrogated  to  the  rights  of  the  mort- 
gagee under  her  mortgage,  and,  upon  paying  the  full  amount  due~orr 
the  mortgage,  shall  receive  an  assignment  of  it.  This  mortgage 
clause  also  provided  that  the  policy  should  not  be  invalidated  as  to  the 
mortgagee  by  any  act  of  the  owner,  or  by  any  change  in  the  title  or 
ownership  of  the  premises. 

On  February  28,  1893,  there  was  a  loss  by  fire  amounting  to 
$1,462.62.  The  plaintiffs  brought  this  action  to  recover  this  loss. 
The  case  was  tried  by  the  court  without  a  jury,  and  judgment  was 
ordered  in  favor  of  Hilles,  for  $1,200,  the  amount  of  her  mortgage, 
and  in  favor  of  Gibb  for  the  balance  of  said  amount  of  the  loss.  From 
the  judgment  entered  thereon,  defendant  appeals. 

The  appellant  concedes  that  the  plaintiff  Hilles  is  entitled  to 
recover,  but  contends  that  a  breach  occurred,  prior  to  the  fire,  which 
avoided  the  policy  as  to  Gibb;  that  he  is  not  entitled  to  recover;  and 
that  defendant  is  entitled,  on  payment  to  Hilles  of  the  amount  of  her 
mortgage,  to  be  subrogated  to  her  rights  under  the  mortgage.  The 
policy  contains  the  following  provisions:  "This  entire  policy,  unless 
otherwise  provided  by  agreement  indorsed  hereon  or  added  hereto, 
shall  be  void  if  any  change,  other  than  by  the  death  of  the  insured, 
takes  place  in  the  interest,  title,  or  possession  of  the  subject  of  insur- 
ance (except  change  of  occupants,  without  increase  of  hazard), 
whether  by  legal  process  of  judgment,  or  by  voluntary  act  of  the 
insured,  or  otherwise." 

It  is  found  by  the  court  that  on  March  23,  1892,  plaintiff  made 
a  contract  in  writing  with  one  Maggie  J.  Kelly  whereby  he  sold  and 
agreed  to  convey  to  her  the  premises,  consisting  of  five  lots,  by  deed 
of  warranty,  on  prompt  and  full  performance  by  her  of  the  agreement, 
and  she  agreed  to  pay  therefor  the  sum  of  $2,500 — $300  cash,  and 
$1,000  in  instalments  of  $50  every  sixty  days  thereafter  until  paid, 
the  balance  to  be  paid  by  her  in  assuming  said  mortgage — she  to  have 
possession  of  the  premises  until  default  in  payment;  and  in  case  of 
such  default  she  agreed  to  surrender  possession  on  demand,  and  that 
the  agreement  should  be  void  at  the  option  of  the  vendor;  that  at 
and  from  the  time  of  making  the  policy  of  insurance,  until  the  time  of 
making  the  contract  of  sale,  the  buildings  had  been  unoccupied? 
and  that,  on  the  making  of  said  contract  of  sale,  said  Kelly  entered 
into  the  possession  of  the  buildings  and  premises,  and  occupied  the 


126  LAW  AND  BUSINESS 

same  until  the  time  of  the  fire,  and  made  all  her  payments  during 
that  time,  and  was  not  in  default  in  any  manner  upon  said  contract. 

It  is  contended  by  appellant  that,  by  the  transactions  with  Kelly, 
there  took  place  a  change  in  the  interest,  title,  and  possession  of  Gibb, 
and  the  condition  against  any  such  change  was  broken,  and  the  policy 
avoided  as  to  him.  It  seems  to  us  that  there  was  a  breach  in  the 
condition  against  any  change  of  interest.  It  is  not  claimed  by  plain- 
tiffs that  there  was  any  waiver  of  this  condition,  and  the  authorities 
cited  by  counsel  are  nearly  all  cases  where  the  breach  claimed  was 
not  of  a  condition  against  a  change  of  interest,  but  a  change  of  title. 
It  is  held  by  the  great  weight  of  authority  that,  where  the  condition 
is  against  any  change  in  the  title,  there  is  no  breach  unless  there  is  a 
change  in  the  legal  title,  that  as  long  as  the  insured  retains  the  legal 
title  and  an  insurable  interest  in  the  premises,  the  policy  is  not  avoided 
by  a  transfer  of  the  equitable  title  or  of  equitable  interests;  but  we 
cannot  apply  this  doctrine  to  a  condition  against  any  change  of 
interest.  The  terms  are  not  synonymous,  as  contended  by  counsel. 
The  word  " interest"  is  broader  than  the  word  " title"  and  includes 
both  legal  and  equitable  rights.  It  is  not  necessary  to  consider  the 
question  of  the  change  of  possession,  except  so  far  as  it  has  an  influence 
on  the  change  of  interests  by  strengthening  and  fortifying  the  interest 
acquired  by  Kelly.  This  disposes  of  the  case. 

The  plaintiff  Hilles  is  entitled  to  judgment  for  the  sum  awarded 
her,  but  upon  payment  of  the  same  the  defendant  is  entitled  to  be 
subrogated  to  her  rights  under  her  mortgage,  and  the  defendant  is 
entitled  to  judgment  against  the  plaintiff  Gibb  that  he  take  nothing 
by  this  action.  The  judgment  appealed  from  should  be  reversed, 
with  directions  to  enter  judgment  in  conformity  with  this  opinion. 

QUESTIONS 

1.  What  was  the  condition  under  consideration  in  this  case?    What  was 
the  act  alleged  to  be  a  breach  of  the  condition  ? 

2.  What  is  the  purpose  of  provisions  against  changes  in  title,  interest,  and 
possession  ? 

3.  Suppose  that  the  condition  had  been:    "When  the  property  shall  be 
alienated  by  sale  or  otherwise,  the  policy  shall  become  void,"  would 
the  act  of  the  insured  in  the  principal  case  have  been  a  breach  of  it  ? 

4.  Suppose  that  the  condition  had  been:    "If  the  property  be  sold  or 
transferred  or  any  change  takes  place  in  the  title  or  possession,  this 
policy  shall  be  void, "  would  the  act  of  the  insured  have  been  a  breach 
of  it? 


DEVICES  FOR  SHIFTING  RISKS  121 

5.  If  the  plaintiff  in  the  principal  case  had  mortgaged  the  insured  premises, 
would  the  court's  conclusion  have  been  the  same  ? 

6.  D  issues  a  policy  of  insurance  to  P,  M,  and  N  on  a  building  owned  by 
them  as  partners.    The  policy  contains  a  clause,  forbidding  changes  in 
interest  or  possession  without  the  consent  of  the  company.    N  sells 
his  interest  in  the  partnership  to  his  copartners.    In  an  action  by  the 
firm  on  the  policy,  the  company  contends  that  there  has  been  a  breach 
of  condition.    What  decision  ? 

7.  In  the  foregoing  case,  M  assigned  his  interest  to  X.    Before  an  account- 
ing had  been  taken,  the  building  burned.    What  decision  in  an  action 
on  the  policy  ? 

8.  P,  M,  and  N  take  X  in  as  a  partner.    What  decision  in  an  action  on 
the  policy  ? 

9.  Standard  policies  usually  provide  that  no  action  shall  be  brought  on 
the  policy  unless  commenced  within  twelve  months  next  after  the 
fire.    Is  this  provision  valid  ?    What  is  the  purpose  of  it  ?    When  does 
the  twelve-month  period  begin  to  run  ?    May  this  condition  be  waived 
by  the  insurer  ? 


VIELE  v.  GERMANIA  INSURANCE  COMPANY 
26  Iowa  Reports  9  (1868) 

BECK,  J.  The  solution  of  one  question  will  dispose  of  many 
points  made  by  defendant  relating  to  the  admission  and  exclusion 
of  evidence,  and  the  giving  and  refusing  of  instructions  to  the  jury. 
The  question  is  this:  Can  the  breach  of  the  conditions  of  the  policy 
against  the  increase  of  the  risk,  without  the  written  consent  of  the 
insurers,  whereby  the  instrument  became  forfeited,  be  waived  by 
parol  or  by  the  acts  of  the  defendant  ? 

The  plaintiff  admitted  the  increase  of  the  risk  by  the  use  of  a  part 
of  the  building  insured  for  the  manufacture  of  rustic  window  shades, 
but  sought  to  avoid  the  forfeiture,  which  otherwise  would  have 
resulted,  by  evidence  tending  to  show  the  consent  of  the  agent  of 
defendant  to  such  use,  his  acts  and  declarations  recognizing  the 
contract  of  insurance,  after  the  increase  of  the  risk,  and  his  admission 
that  the  building  continued  to  be  covered  by  the  policy.  This  evi- 
dence was  given  to  the  jury  against  the  objection  of  defendant,  and 
the  court  held,  in  the  instructions  to  the  jury,  that  such  facts,  if 
proved,  would  operate  as  a  waiver  of  the  forfeiture  and  entitle  plaintiff 
to  recover.  The  following  are  among  the  conditions  of  the  policy: 
"  If  the  above-mentioned  premises  shall  be  used  or  occupied  so  as  to 


122  LAW  AND  BUSINESS 

increase  the  risk,  or  become  vacant  and  unoccupied,  or  the  risk  be 
increased  by  the  erection  of  adjacent  buildings,  or  by  any  other 
means  whatever,  within  the  control  of  the  assured,  without  the  assent 
of  the  companies  indorsed  hereon;  or  if  the  assured  shall  keep  upon 
the  said  premises  gunpowder  or  phosphorus;  or  petroleum,  or 
rock  or  earth  oils,  or  benzole,  benzine,  or  naphtha,  or  any  explosive 
substance,  or  shall  keep  or  use  upon  the  said  premises  camphene, 
spirits,  gas,  or  chemical  oils,  without  written  permission  on  this 
policy,  then,  and  in  every  case,  this  policy  shall  be  void." 

The  question  above  stated  is  fairly  presented  by  the  record,  and 
is  of  very  great  importance,  not  only  in  its  relation  to  this  case,  but 
to  the  business  of  insurance  generally.  We  have  endeavored  to  give 
it  the  careful  and  patient  consideration,  aided  by  the  able  argument 
of  the  counsel  for  the  respective  parties,  which  its  importance  demands. 

The  position  of  the  defendant's  counsel,  which  is  supported  by 
several  authorities,  is  to  the  effect  that  upon  breach  of  the  conditions 
of  the  policy  by  the  assured,  which  would  defeat  recovery  thereon, 
it  becomes  absolutely  void,  as  it  were,  dead — and  that  nothing 
short  of  a  new  creation  could  impart  vitality  to  it.  This  doctrine 
is  certainly  unsound  when  applied  to  other  contracts;  for,  on  the 
contrary,  after  default  in  the  conditions  by  one  party,  the  other  may 
waive  the  forfeiture  and  treat  the  instrument  as  of  binding  force  upon 
himself.  No  reasons  can  be  given  to  except  policies  of  insurance  from 
the  operation  of  this  rule.  The  party  in  default  cannot  defeat  the 
contract;  the  party  for  whose  benefit  the  conditions  are  introduced 
may  waive  the  forfeiture.  It  follows,  therefore,  that  the  instrument 
is  forfeited  at  the  option  of  the  innocent  party;  and  if  he  waives  the 
forfeiture,  the  contract  stands  as  if  no  breach  had  occurred.  In 
Williams  v.  Bank  of  the  United  States,  2  Peters  102,  the  doctrine  is 
announced  in  these  words:  "If  a  party  to  a  contract,  who  is  entitled 
to  the  benefit  of  a  condition,  upon  the  performance  of  which  his 
responsibility  is  to  arise,  dispenses  with,  or  by  any  act  of  his  own 
prevents,  the  performance,  the  opposite  party  is  excused  from  proving 
a  strict  compliance  with  the  condition." 

We  conclude,  therefore,  that  the  forfeiture  of  the  policy  on  account 
of  the  breaches  of  the  conditions  thereof,  could  have  been  waived  by 
the  defendant,  and  if  waived,  the  policy  continued  of  the  same 
binding  force  which  it  originally  possessed.  This  view  is  sustained 
by  the  following  authorities:  Keenan  v.  Mo.  State  Mutual  Insurance 
Co .,12  Iowa  126;  Viallv.  Insurance  Co.,ig  Barb.  440;  Insurance  Co. 


DEVICES  FOR  SHIFTING  RISKS  123 

v.  Stockbower,  26  Penn.  St.  199;  Buckbee  v.  Life  Insurance  Co.,  18 
Barb.  541;  Beat  v.  Park  Insurance  Co.y  16  Wis.  241;  Wing  v.  Harvey, 
27  Eng.  Law  &  Eq.  140;  Peoria  F.  6*  M.  Insurance  Co.  v.  Hall,  12 
Mich.  202. 

We  are  next  led  to  inquire  as  to  the  manner  of  the  waiver  of  the 
forfeiture,  whether  it  must  be  in  writing  or  may  be  parol,  and  what 
acts  of  the  defendant  will  amount  to  a  waiver. 

Parol  evidence  is  not  admissible  to  contradict  or  alter  a  written 
instrument,  but  this  rule  does  not  exclude  such  evidence  when  adduced 
to  prove  that  a  written  contract  is  discharged,  or  that  the  damages  for 
nonperformance  were  waived,  or  that  performance  of  a  part  of  the 
contract  was  dispensed  with,  i  Greenleaf's  Ev.  sec.  302-4;  2  Phil. 
Ev.  (Cowen  &  Hill's  and  Edward's  Notes)  692  and  Note  505;  2 
Starkie's  Ev.  574;  Fleming  v.  Gilbert,  3  Johns.  528;  Merrill  v.  Ithaca 
6*  Oswego  Railroad  Co.,  16  Wend.  586. 

These  exceptions  to  the  rule,  or  rather  the  rule  admitting  parol 
evidence  for  these  purposes,  may  not  apply  to  specialties;  but  a 
contract  of  insurance  need  not  be  by  specialty,  or  even  in  writing. 
It  seems  to  be  the  better  opinion  that  it  may  be  oral  only.  Parsons' 
Maritime  Law,  19  and  notes;  City  of  Davenport  v.  Peoria  Insurance 
Co.,  17  Iowa  276;  Commercial- Insurance  Co.  v.  Union  Insurance  Co., 
19  How.  321;  Baptist  Church  v.  Brooklyn  Insurance  Co.,  19  N.Y.  305. 
We  need  not,  then,  inquire  whether  a  policy  executed  by  an  incor- 
poration and  attested  by  its  corporate  seal  is  a  specialty,  for  the 
policy  sued  on  is  not  sealed  by  the  companies,  and  is  therefore  a  sim- 
ple contract  and  not  a  specialty.  The  rule  therefore  will  not  in  this 
suit  exclude  parol  evidence  for  the  purposes  above  mentioned.  The 
cases  which  we  will  hereafter  cite,  in  considering  what  acts  may 
amount  to  a  waiver  of  conditions  or  forfeiture  on  account  of  breaches 
of  conditions,  support  this  doctrine  and  will  illustrate  its  application. 

It  is  argued  that  the  condition  in  the  policy,  to  the  effect  that  an 
increase  hi  the  risk  avoids  the  contract  on  the  part  of  the  under- 
writers, unless  consent  thereto  be  had  in  writing,  implies  that  such 
consent  can  be  given  in  no  other  way.  It  will  be  at  once  remarked, 
that  this  restriction  is  itself  a  condition,  and  is  just  as  capable  of 
being  waived  or  dispensed  with  as  any  other  condition  of  the  instru- 
ment and  in  the  same  way.  There  is  nothing  in  the  terms  of  this 
condition  prohibiting  its  waiver.  But  the  conditions  of  the  policy 
became  broken  by  an  increase  of  the  risk,  without  written  consent, 
and  there  at  once  happened  a  forfeiture  whereby  defendant  was 


124  LAW  AND  BUSINESS 

discharged  from  the  contract.  Now,  as  a  matter  of  fact,  the  waiver 
was  not  of  the  written  consent,  but  of  the  forfeiture. 

What  will  amount  to  or  have  the  effect  of  a  waiver  of  a  forfeiture 
of  the  policy;  or  a  dispensation  of  the  performance  of  its  conditions  ? 
The  party  for  whose  benefit  a  condition  is  introduced  in  a  contract 
may  determine  whether  it  shall  or  shall  not  be  enforced,  and,  as  we 
have  seen,  may  waive  or  dispense  with  its  performance.  It  seems 
reasonable  that  the  same  character  of  evidence  will  establish  a  waiver 
or  dispensation  of  conditions  that  is  sufficient  to  prove  the  existence 
of  a  contract.  An  express  agreement  to  that  effect  will  of  course  be 
sufficient.  Circumstances  proving  that  the  party  treated  the  contract 
as  subsisting  and  not  forfeited,  a  course  of  dealing  consistent  only 
with  that  hypothesis,  and  acts  and  declarations  whereby  the  other 
party  was  induced  to  believe  that  the  condition  was  dispensed  with 
or  forfeiture  waived,  will  be  sufficient  to  preclude  the  setting  up 
of  the  breaches  of  the  condition  as  a  defense  to  the  contract  of  the 
party  bound  thereby.  Thus  the  receipt  of  premium  upon  a  policy 
after  forfeiture  is  a  waiver  thereof.  North  Berwick  Co.  v.  Insurance 
Co.,  52  Maine  336;  New  York  Insurance  Co.  v.  National  Protective 
Insurance  Co.,  20  Barb.  468;  Liddle  v.  Market  Fire  Insurance  Co.,  29 
N.Y.  184;  Ames  v.  New  York  Union  Insurance  Co.,  26  idem  263; 
Bochem  v.  Williamsburgh  Insurance  Co.,  35  idem  131 ;  Goit  v.  National 
Prot.  Insurance  Co.,  25  Barb.  189;  Viall  v.  Genes ee  Mutual  Insurance 
Co.,  19  idem  446;  Frost  v.  Saratoga  Mutual  Insurance  Co.,  5  Den. 
154;  Lycoming  Insurance  Co.  v.  Stockbower,  26  Penn.  St.  199. 

So  the  taking  of  an  additional  risk  on  the  same  policy  will  waive 
a  forfeiture,  existing  at  the  time,  for  breach  of  condition,  Rathborn  v. 
City  Insurance  Co.,  31  Conn.  193.  The  knowledge  of  the  officers  of  an 
insurance  company  taking  a  risk  upon  the  life  of  a  party,  that  he 
intended  to  go  south  of  a  certain  degree  of  latitude,  is  a  dispensation 
of  a  condition  that  the  insured  should  not  go  beyond  that  latitude. 
Bevin  v.  Connecticut  Life  Insurance  Co.,  23  Conn.  244.  The  renewal  of 
a  life  policy  which  had  expired  by  nonpayment  of  premium,  in  favor  of 
one  who  at  the  time  was  sick,  and  so  known  to  the  officer  renewing 
the  policy,  is  a  waiver  of  conditions  against  ill  health  of  the  assured, 
which  otherwise  would  have  avoided  the  policy.  Buckbee  v.  United 
States  Insurance  &  Trust  Co.,  18  Barb.  541.  The  following  cases  which 
illustrate  the  doctrine  under  discussion,  we  have  not  space  to  classify 
or  further  notice  in  this  connection.  Peoria  Insurance  Co.  v.  Hall,  12 
Mich  202;  Sheldon  v.  Atlantic  Insurance  Co.,  26  N.Y.  460;  Warner 


DEVICES  FOR  SHIFTING  RISKS  125 

v.  Peoria  Insurance  Co.,  14  Wis.  318;  N.E.F.  &°  M.  Insurance  Co.  v. 
Schettler,  38  111.  166;  Coursen  v.  Pennsylvania  Insurance  Co.,  46  Penn. 
St.  323;  Ruse  v.  Mutual  Benefit  Life  Insurance  Co.,  26  Barb.  556. 

It  will  be  observed  that  the  waiver  of  the  condition  or  forfeiture 
under  these  authorities  is  not  required  to  be  supported  by  a  considera- 
tion. In  the  cases  where  it  is  held  that  the  payment  of  premium 
upon  a  policy  forfeited  for  breaches  of  condition  is  a  waiver  of  for- 
feiture, the  payment  was  not  made  in  consideration  of  the  waiver, 
but  for  the  renewal  or  continuance  of  the  insurance.  The  waiver  or 
dispensation  is  not  in  the  nature  of  a  contract  which  requires  the 
support  of  a  consideration,  but  rather  of  an  estoppel,  whereby  the 
underwriter  is  precluded  from  denying  the  validity  of  the  contract, 
on  account  of  acts  or  admissions  either  recognizing  it  as  of  binding 
force  after  the  forfeiture,  or  holding  out  to  the  assured  that  the  per- 
formance of  the  condition  is  dispensed  with. 

It  is  not  an  accurate  use  of  terms  to  say  that  the  condition  of  a 
contract  must  be  supported  by  a  consideration.  The  contract  itself 
must  be,  but  the  condition  is  a  mere  incident  thereto,  and  its  suffi- 
ciency, validity,  or  force  is  in  no  way  affected  or  dependent  upon  the 
consideration.  It  is  true  the  condition  may  influence  the  parties  in 
fixing  the  amount  of  the  consideration,  but  the  law  will  not,  in  the 
absence  of  fraud,  inquire  into  its  sufficiency,  nor  hold  a  contract 
invalid  because  a  full  or  just  value  has  not  been  received  by  the 
obligor.  The  case  of  a  policy  of  insurance  illustrates  the  point.  The 
underwriter  is  bound  thereby  to  pay  the  assured  the  amount  of  any 
loss  by  fire  which  may  happen  to  his  property  within  a  certain  time. 
The  consideration  of  this  contract  is  the  premium  received  by  the 
underwriter.  The  assured  is  bound  not  to  permit  the  risk  to  be 
increased;  this  obligation  is  the  condition  of  the  policy,  and  with  it 
we  can  associate  no  idea  of  consideration.  It  may  enter  into  the 
contemplation  of  the  underwriter  when  fixing  the  value  of  the  risk, 
which  may  be  worth  a  greater  premium  without  the  condition  in  the 
policy,  but  the  adequacy  of  the  consideration,  as  we  have  remarked, 
is  not  a  matter  of  inquiry,  and  the  consideration  itself  no  element  of 
the  condition.  We  conclude,  therefore,  that,  as  the  condition  is  not 
dependent  upon,  nor  supported  by,  the  consideration,  it  may  be 
waived  or  dispensed  with  even  by  an  agreement  without  consideration. 

By  the  terms  of  the  policy  the  underwriters  reserved  the  right  to 
cancel  it  upon  the  risk  being  increased,  or  for  any  other  cause  "by 
paying  to  the  assured  the  unexpired  premium  pro  rata."  The  point 


126  LAW  AND  BUSINESS 

is  made  by  the  plaintiff,  that  if  the  risk  be  increased,  of  which  the 
underwriters  have  notice,  and  the  right  to  cancel  is  not  exercised, 
this  amounts  to  a  waiver  of  the  forfeiture  incident  to  a  breach  of  the 
condition  against  increase  of  risk.  The  decision  of  this  question  is  not 
necessary,  as  the  case  is  determined  without  it.  But,  for  myself, 
I  am  free  to  admit  the  force  of  the  position,  in  view  of  the  peculiar 
facts  of  the  case,  and  that  I  believe  it  is  supported  by  sound  reason. 
Without  discussing  the  legal  principles  upon  which  it  is  founded,  it 
will  readily  be  seen  to  be  in  harmony  with  our  ideas  of  fair  and  honest 
dealing.  The  agent  had  full  notice  of  the  increase  of  the  risk,  obtained 
upon  an  examination  of  the  property,  made  in  discharge  of  his  duty, 
for  the  express  purpose  of  determining  whether  there  had  been  such 
increase.  This  notice  to  the  agent  bound  the  companies.  Keenan  v. 
Missouri  State  Mutual  Insurance  Co. ,12  Iowa  131.  If  the  agent  deter- 
mined that  the  risk  was  increased,  his  duty  to  his  principals  of  good 
faith  toward  the  assured,  and  every  principle  of  honesty,  required  him 
to  cancel  the  policy  and  advise  the  assured  of  the  fact.  It  was  bad 
faith  of  the  darkest  hue  for  the  agent,  upon  determining  that  the  risk 
was  increased,  so  to'act  and  speak  as  to  induce  assured  to  believe  that 
the  policy  continued  to  cover  the  property.  The  companies  thereby 
retained  the  money  paid  as  premiums,  which  they  had  not  earned, 
and  which  their  contract  required  should  be  repaid  to  the  assured  upon 
canceling  the  policy,  and  induced  their  confiding  customer  to  trust 
for  indemnity,  to  the  extent  of  many  thousand  dollars,  for  loss  of  his 
property,  upon  a  contract  which  they  had  predetermined  was  avoided, 
and  upon  which,  according  to  their  interpretation  of  the  law,  he  could 
not  recover  one  cent.  Such  a  course  of  dealing  indicates  a  reckless 
and  fraudulent  spirit  of  gain,  which  will  hazard  the  property  of  others 
to  the  value  of  tens  of  thousands  in  order  to  secure  an  inconsiderable 
and  paltry  sum.  On  the  other  hand,  if,  upon  such  examination  of  the 
property,  the  agent  honestly  determined  that  there  was  not  such 
increase  of  risk  as  required  the  exercise  of  his  power  to  cancel  in  order 
to  protect  the  interest  of  his  principals,  and  acted  upon  that  determina- 
tion, whereby  the  plaintiff  was  induced  to  rely  upon  the  policy  as  a 
valid,  binding  contract,  the  underwriters  ought  to  be  bound  by  such 
determination  and  acts  of  their  agent,  and  ought  not  to  be  permitted 
to  set  up,  as  a  breach  of  the  conditions,  the  very  things  which  the 
agent  decided  were  not  breaches.  In  such  a  case,  while  the  agent 
would  be  relieved  of  the  charge  of  dishonesty,  it  would  be  successfully 


DEVICES  FOR  SHIFTING  RISKS  127 

sustained  against  his  principals.  In  whatever  light  we  may  view 
the  facts  that  the  increase  of  the  risk  was  fully  known  to  the  agent, 
and  no  steps  were  taken  to  cancel  the  policy  in  accordance  with  its 
terms,  they  involve  bad  faith  and  deceit,  whereby  one  party  in  order_ 
to  realize  a  small  sum  puts  at  hazard  great  interests  of  another,  a 
course  of  dealing  repulsive  to  all  right  notions  of  justice,  and  nowhere 
practiced  among  honest  men. 

It  is  argued  by  the  defendant's  counsel,  that  the  waiver  of  the 
breach  of  the  condition  of  the  policy,  on  account  of  the  rustic  window- 
shade  manufactory,  extended  only  to  the  acts  in  violation  of  the  terms 
of  the  policy  done  before  such  alleged  waiver,  and  that  the  condition 
continued  to  be  daily  violated  by  the  continuance  of  the  cause  of  the 
increase  of  risk;  and  that,  as  it  is  not  pretended  that  there  was 
any  waiver  of  the  breaches  resulting  therefrom,  the  policy  is  thereby 
avoided.  The  error  of  this  argument  is  apparent.  The  waiver 
extended  to  all  breaches  resulting  from  the  manufacture  of  rustic 
window-shades  in  the  building  insured,  and  the  parties  in  all  their 
intercourse  concerning  the  increase  of  the  risk,  and  by  their  acts 
touching  the  same,  had  reference  to  the  continuation  of  the  manu- 
factory, and  of  course  contemplated  the  waiver  of  the  breaches  result- 
ing therefrom,  and  the  dispensation  of  the  conditions  of  the  policy 
prohibiting  it. 

The  policy  expressly  prohibited  the  keeping  of  benzine  upon  the 
premises  insured.  There  was  evidence  tending  to  prove  that  this 
fluid  was  necessary  in  the  preparation  of  the  paints  and  varnishes  used 
in  the  manufacture  of  rustic  window-shades,  and  that,  at  the 
time  of  the  fire,  it  was  kept,  for  that  purpose  upon  the  premises,  in 
tin  cans,  in  quantities  not  exceeding  two  gallons.  The  evidence  also 
tended  to  prove  that  the  agent  gave  permission  for  keeping  benzine 
for  the  purposes  and  in  the  manner  and  quantities  aforesaid.  This 
permission  was  given,  as  it  is  claimed,  at  the  time  the  alleged  consent 
was  given  to  the  continuation  of  the  window-shade  manufactory. 
The  court  instructed  the  jury,  substantially,  that  a  consent  to  the 
occupation  of  the  building  for  the  manufactory  implied  a  consent 
to  the  use  of  such  articles  as  were  necessary  to  be  used  in  the  business. 
This  instruction  was  clearly  correct.  The  consent  to  the  manufacture 
of  the  window-shades  implied  a  consent  to  the  use  of  benzine  if  it  was 
necessary  or  comonly  used  in  making  those  articles;  otherwise  a  direct 
permission  to  continue  the  manufactory  would  be  defeated  by  the 
prohibition  in  the  policy. 


128  LAW  ANt>  BUSINESS 

This  permission  operated  to  dispense  with  the  prohibition.  In 
Citizens'  Insurance  Co.  v.  McLaughlin,  6  Am.  Law  Register,  N.S.  374, 
lately  decided  in  the  Supreme  Court  of  Pennsylvania,  this  doctrine 
was  recognized.  In  that  case  the  policy  covered  a  patent-leather 
manufactory,  and  the  keeping  of  benzine  upon  the  premises  was  pro- 
hibited, and  confined  to  a  shed  detached  therefrom.  It  was  a  neces- 
sary article  in  the  manufacture  of  patent-leather,  and  was  ordinarily 
carried  in  a  bucket,  containing  three  or  four  gallons,  into  the  building 
insured.  The  benzine  took  fire  in  the  bucket  and  the  building  was 
consumed.  The  court  held  that  the  permission  to  use  the  building  for 
a  patent-leather  manufactory,  carried  with  it  the  permission  to  use 
all  articles  necessary  to  the  business,  and  dispensed  with  the  prohibi- 
tion expressed  in  the  policy.  The  same  rule  is  announced  in  the 
following  cases:  Harper  v.  Albany  Insurance  Co.,  17  N.Y.  194;  Har- 
per v.  New  York  Insurance  Co.}  22  idem  441;  Pindar  v.  Kings  County 
Insurance  Co.,  36  idem  648. 

In  the  light  of  the  doctrines  above  announced,  we  find  no  error 
in  the  rulings  of  the  court  upon  the  admission  of  evidence  and  the  sub- 
mission of  questions  to  the  jury  for  special  findings.  It  is  not  neces- 
sary to  state  the  special  questions  raised,  or  evidence  admitted  or 
excluded.  Neither  do  we  find  error  in  the  finding  or  refusal  to  give 
instructions  asked  by  the  parties.  Those  given  are  in  harmony  with 
the  principles  of  this  opinion;  those  refused  are  not.  It  would 
answer  no  useful  purpose  to  refer  to  them  more  fully.  The  verdict, 
as  well  as  the  special  findings,  are  well  supported  by  the  evidence. 
The  motions  to  set  them  aside  were  properly  overruled. 

Affirmed. 

QUESTIONS 

1.  P's  policy  provides:   "If  gasoline  is  used  on  the  insured  premises  with- 
out the  consent  of  the  insurer,  the  policy  shall  be  void."    What  is 
the  effect  on  the  contract  of  P's  use  of  gasoline  on  the  premises?    Is 
the  user  a  condition  subsequent  terminating   the  insurer's  liability? 
Or  is  the  non-user  a  condition  precedent  to  the  insurer's  liability? 

2.  P  effects  insurance  on  property  which  belongs  to  X.    D,  aware  of  the 
facts,  continues  to  receive  premiums   from  P  until  the  house  is  de- 
stroyed by  fire.    P  sues  on  the  policy.    D  contends  that  the  policy  is 
void  for  want  of  an  insurable  interest.    P  replies  that  D  waived  lack 
of  insurable  interest.    What  decision  ? 

3.  D  insures  X's  life  in  favor  of  W.    The  policy  provides  that  no  recovery 
can  be  had  on  it  if  the  life  of  the  insured  is  terminated  by  legal  judg- 


DEVICES  FOR  SHIFTING  RISKS  129 

ment.  The  company,  in  writing,  promises  W  to  pay  the  loss,  X's 
execution  for  murder  to  the  contrary  notwithstanding.  What  decision 
in  any  action  by  P  on  the  policy  ? 

4.  P's  policy  forbids  the  use  of  gasoline  on  the  insured  premises  without 
.    the  written  consent  of  an  officer  of  the  company.     P,  with  the  verbal 

consent  of  an  officer  of  the  company,  uses  the  forbidden  article  in  the 
insured  building.  P  sues  on  the  policy.  D  relies  on  a  breach  of  condi- 
tion. P  replies  that  the  condition  was  waived  by  an  officer  of  the 
company.  D  contends  that  there  was  no  waiver  for  the  following 
reasons:  (a)  that  a  waiver  could  only  be  made  in  writing;  (b)  that 
there  was  no  consideration  for  the  promise  to  waive  the  condition; 
(c)  that  the  promise  of  the  officer  of  the  company,  if  construed  as  a 
waiver,  would  violate  the  parol  evidence  rule.  What  decision  ? 

5.  This  is  an  action  on  a  policy  which  contains  a  clause  that  the  policy 
shall  be  void  in  case  gasoline  is  kept  on  the  insured  premises  without 
the  consent  of  the  company.    When  A,  a  general  agent  of  the  com- 
pany, delivered  the  policy,  he  saw  that  gasoline  was  then  being  kept 
on  the  insured  premises.    P  sues  for  a  loss  under  the  policy.    What 
decision  ? 

6.  Action  on  a  policy  which  provides  that  it  shall  be  void  unless  the  pre- 
miums are  paid  promptly  each  month.    The  company  pleads  as  a 
defense  that  the  premiums  were  not  paid  promptly  each  month.     P 
replies  that  A,  a  general  agent  of  the  company,  stated  that  the  pre- 
miums might  be  paid  semi-annually.    What  decision  ? 

7.  In  the  foregoing  case,  P  proves  that  A,  before  the  execution  and  delivery 
of  a  policy,  orally  stated  that  the  premiums  might  be  paid  semi-annually. 
What  decision  ? 

8.  P,  with  the  verbal  permission  of  an  agent  of  the  company,  increased  the 
risk  insured  against  in  violation  of  a  term  in  the  policy.    P  sues  for  a 
loss  under  the  policy.     D  contends  that  the  policy  is  at  an  end  because 
of  a  breach  of  condition.    P  offers  evidence  to  prove  that  on  previous 
occasions  this  agent  had  changed  terms  in  the  policy  and  that  these 
changes  had  been  acquiesced  in  by  the  company.     Should  the  evidence 
be  admitted  ? 

IV)    Amount  of  Recovery 

COMMONWEALTH  INSURANCE  COMPANY  v.  SENNETT 

37  Pennsylvania  Reports  205  (1860) 

This  was  an  action  of  debt,  brought  in  the  court  below  by  Pardon 
Sennett,  M.  R.  Barr,  Conrad  Brown,  and  J.  J.  Finley,  partners  doing 
business  as  Sennett,  Barr  &  Co.,  against  the  Commonwealth  Insurance 
Company. 


130  LAW  AND  BUSINESS 

The  plaintiffs  below  were  owners  of  a  number  of  machines  called 
mowers  and  reapers,  which  they  had  manufactured  for  sale  and  stored 
in  a  warehouse  at  Erie.  These  were  insured  against  loss  or  damage 
by  fire  by  the  defendants  below,  in  a  policy  in  the  usual  form,  in  the 
sum  of  $3,000.  The  policy  was  dated  May  25,  1857,  and  was  for  the 
term  of  six  months.  On  November  25,  1857,  the  policy  was  renewed 
by  J.  J.  Lints,  agent  of  defendants,  for  a  further  period  of  six  months. 
On  the  night  of  February  10,  1858,  the  property  insured  was  totally 
destroyed  by  fire. 

On  the  trial,  the  defendants  offered  to  show,  by  Matthew  Dickson 
and  others,  that  the  kind  of  machines  known  as  Danforth's  reaper  and 
mower,  and  manufactured  by  the  plaintiffs,  and  being  the  same  kind 
of  machines  insured  and  destroyed,  were  of  little  or  no  value — were 
worthless  as  an  agricultural  instrument,  or  for  any  other  purpose — and 
that  they  had  no  value,  save  as  mere  wood  and  old  iron,  and  that  the 
machines  were  worthless  both  on  account  of  defects  in  construction, 
and  in  the  principle  of  the  machines  themselves.  To  this  the  plaintiffs 
objected,  but  the  court  said:  "We  will  admit  evidence  to  show  that 
the  machines  could  be  manufactured  at  a  less  price  than  the  plaintiffs' 
witnesses  say  they  were  made  and  sold  for,  or  the  plaintiffs  knew,  when 
making  them,  that  they  were  worthless  in  principle,  and  that  they 
were  defective  in  workmanship,  but  not  that  they  were  defective  in  prin- 
ciple, as  it  was  patented  one."  To  this  ruling  the  defendants  excepted. 

The  policy  provided,  among  other  things,  as  follows:  "And  the 
said  company  do  hereby  promise  and  agree  to  make  good  unto  the 
said  assured,  their  executors,  administrators,  or  assigns,  all  such 
immediate  loss  or  damage  not  exceeding  the  sum  hereby  insured, 
as  shall  happen  by  fire  to  the  property  above  specified,  the  said  loss 
or  damage  to  be  estimated  according  to  the  true  and  actual  cash 
value  of  the  said  property  at  the  time  the  same  shall  happen." 

The  defendants  requested  the  court  to  instruct  the  jury  as  to  the 
measure  of  damages,  that  the  jury  were  not  to  be  confined  to  the 
evidence  of  the  cost  of  manufacturing  the  machines  as  given  by  plain- 
tiffs, but  might  be  governed  by  the  actual  cash  value,  as  proved  by 
defendants,  without  reference  to  the  cost  of  construction.  The  court 
refused  so  to  charge  the  jury,  but  instructed  them  that  "  the  value  as 
estimated  in  the  manufacture  of  each  machine,  and  before  it  was  tried 
in  the  field,  would  be  the  standard  of  valuation."  And  further,  on 
this  point,  the  court  said  to  the  jury:  "Admitting  that  many  of  the 
machines  did  not  work  when  they  were  put  to  the  trial,  and  this 


DEVICES  FOR  SHIFTING  RISKS  131 

because  of  a  defect  in  the  principle  upon  which  they  were  got  up, 
and  not  in  the  mechanism  of  them,  that  would  not  interfere  with  the 
plaintiffs'  right  to  recover  according  to  their  estimated  or  actual  value 
when  the  insurance  was  made,  unless,  as  before  stated,  the  plaintiffs 
were  aware  of  the  defect.  The  asking  or  selling  price  would  not  be  the 
standard  of  value,  for  the  company  would  have  the  opinion  to  replace 
by  similar  articles  or  pay  the  cash,  but  the  cost  of  construction" 

The  jury  found  in  favor  of  the  plaintiffs  the  sum  of  $3,262.50, 
and  judgment  having  been  entered  thereon,  the  case  was  removed 
into  this  court  by  the  defendants,  who  assigned  for  error  the  instruc- 
tion of  the  court  below,  as  to  the  measure  of  damages. 

THOMPSON,  J.  There  is  nothing  in  the  policy  of  the  law  which 
abridges  the  right  and  power  of  parties  to  a  contract  of  insurance  from 
stipulating  in  regard  to  the  mode  and  manner  of  estimating  or  valuing 
a  loss  when  it  shall  occur,  or  as  to  the  time  which  shall  be  the  period 
of  the  valuation  of  the  property  destroyed,  or  such  other  matters 
within  the  scope  of  a  fair  transaction  as  they  may  see  proper.  Insur- 
ance is  a  contract  of  indemnity,  and  if  the  parties  stipulate  for  the 
way  in  which  that  indemnity  shall  be  made,  on  the  contingency  of 
liability,  it  is  their  right  to  do  so,  and  the  law  will  carry  out  their 
contracts  as  made,  if  there  be  no  fraud  in  them,  as  in  other  cases: 
Trask  v.  The  State  Fire  6s  Marine  Insurance  Co.,  5  Casey  198;  North 
Western  Insurance  Co.  v.  Phoenix  Oil  and  Candle  Co.,  7  Casey  448. 

The  policy  in  this  case  was  an  open  one,  as  contra-distinguished 
from  a  valued  policy,  and  in  it  the  parties  have  chosen  to  fix  for  them- 
selves the  standard  of  valuation,  and  have  stipulated  that  it  should 
be  the  "true  actual  cash  value  of  property,"  and  the  time  for  ascer- 
taining such  value,  to  be  the  date  of  its  injury  or  destruction  by  fire. 
Now,  unless  it  can  be  shown  that  they  had  not  the  right  so  to  contract, 
or  have  used  terms  possessing  some  other  than  their  ordinary  meaning 
and  import,  this  basis  for  estimating  the  loss  thus  established  must 
control  and  govern.  It  is  the  law  of  the  contract  established  by  the 
parties  themselves.  Nothing  has  or  can  be  shown,  we  think,  to 
countervail  their  right  so  to  contract  in  regard  to  the  subject-matter 
mentioned,  or  which  controls  the  ordinary  meaning  of  the  terms  used 
by  them.  This  has  not  and  cannot  be  done.  The  contract  is  so 
plain,  that  interpretation  is  not  needed  to  arrive  at  what  was  meant. 
The  parties  meant  only  what  they  have  plainly  said;  and  it  was  a 
plain  mistake  to  disregard  the  language  used,  and  construe  the  con- 
tract as  if  no  stipulation  existed. 


132  LAW  AND  BUSINESS 

The  case  of  Niblo  v.  The  North  American  Insurance  Co.,i  Sandford 
558,  has  no  possible  bearing  on  the  point  in  question.  There  the 
policy  contained  no  stipulation  such  as  we  find  here,  and  the  court 
allowed  the  full  of  the  tenement  insured  without  regard  to  the  extrinsic 
circumstance  that  it  was  to  be  removed  within  fifteen  days.  They 
held  that  peradventure  the  lease  of  the  ground  might  be  renewed, 
or  the  insured  might  sell  it  to  the  owner  of  the  ground,  or  its  value 
might  not  be  unpaired  by  removing  it  to  an  adjacent  vacant  lot. 
Intrinsically  it  was  not  impaired  by  the  circumstance  that  the  ground 
lease  was  soon  to  end.  Such  had  been  the  doctrine  laid  down  in 
Laurent  v.  The  Chatham  Fire  Insurance  Co.,  i  Hall  41.  Such  cases  as 
these  are  good  enough  law  where  they  belong,  but  furnish  no  rule 
where  the  parties  have  fixed  a  law  for  themselves.  These  views  apply 
as  well  to  the  restricted  operation  of  the  testimony  received,  as  to  the 
ruling  in  answer  to  the  defendants'  eleventh  point.  There  was 
error  in  both. 

The  option  to  replace  the  machinery,  if  destroyed,  was  a  reserva- 
tion for  the  benefit  of  the  company;  they  were  not  bound  to  adopt  it. 
What  it  would  cost  to  replace  it  was,  therefore,  not  to  furnish  the 
rule  for  the  damages  which  the  company  must  pay  to  make  good  the 
loss.  If  this  were  to  be  held,  it  would  be  equivalent  to  enforcing  the 
option  as  an  obligation.  It  is  stated  in  Angell  on  Insurance,  sec.  269, 
that  the  insurers  have  the  privilege  of  making  repairs  or  replacing 
property  if  they  see  fit  to  do  so;  but  if  they  elect  not  to  do  so,  "  they  are 
liable  only  to  pay  a  fair  indemnity  for  the  loss."  This  shows  that 
the  estimated  cost  of  a  compliance  with  the  option  is  not  to  be  con- 
sidered in  assessing  the  amount  to  be  paid  on  the  loss.  If  it  had  any 
weight  here,  it  was  wrong. 

Nor  was  the  fact  that  the  machines  insured  were  constructed  under 
a  patent  of  any  importance.  Patented  or  unpatented,  what  they 
are  worth  at  the  happening  of  the  fire  was,  by  the  agreement  of  the 
parties,  to  be  the  measure  of  their  value;  and  this  must  be  ascertained 
by  testimony,  as  is  done  in  every  other  case,  where  the  value  is  not 

fixed. 

Judgment  reversed. 

QUESTIONS 

i.  P  insures  his  home  for  $3,000.  It  is  worth  that  amount  to  him  but  he 
would  not  be  able  to  secure  more  than  $1,500  for  it  in  the  market. 
What  is  the  measure  of  P's  recovery  in  the  event  of  the  destruction  of 
the  house  by  fire  ? 


DEVICES  FOR  SHIFTING  RISKS  133 

2.  P,  gratuitous  bailee  of  property  belonging  to  X,  insures  it  in  his  own 
name  for  its  full  value.    The  property  is  destroyed  by  fire.    What 
decision  in  any  action  by  P  for  the  whole  value  ? 

3.  X,  owner  of  a  house  and  lot  reasonably  worth  $10,000,  mortgagesjt  to 
P  to  secure  a  debt  of  $1,500.     P  insures  the  house  for  the  amount  of  the 
debt.    A  fire  occurs,  causing  damage  to  the  property  to  the  extent  of 
$2,000.     P  sues  on  the  policy  for  $1,500.    The  company  contends  that 
he  is  not  entitled  to  recover  because  the  mortgaged  property  is  still  suffi- 
cient as  security  for  the  debt.    What  decision  ? 

4.  X  contracts  to  sell  a  house  and  lot  to  P  for  $5,000.    The  house  is  reason- 
ably worth  $3,500  and  P  insures  it  for  that  amount.    Before  he  has 
paid  any  part  of  the  purchase  price,  the  house  is  destroyed  by  fire. 
What  are  P's  rights  under  the  policy  ? 

5.  P  is  a  life  tenant  of  an  estate  on  which  there  is  a  house  worth  $10,000. 
At  the  age  of  seventy  years,  P  insures  the  house  for  $8,000.    Three  days 
later,  P  dies.     P's  personal  representative  brings  an  action  on  the  policy 
for  $8,000.     What  decision  ? 

OSHKOSH  GAS  LIGHT  COMPANY  v.  GERMANIA  FIRE 
INSURANCE  COMPANY 

71  Wisconsin  Reports  454  (1888) 

Action  by  the  plaintiffs  on  an  insurance  policy  issued  by  the 
defendant.  On  the  trial,  the  jury  returned  a  verdict  of  $220.63. 
From  the  judgment  rendered  thereon  the  defendant  appeals. 

CASSODAY,  J.  Upon  the  verdict  of  the  jury  it  must  be  assumed 
that  the  building  mentioned  was  wholly  destroyed  by  the  fire.  At 
the  time  of  such  destruction  it  was  insured  in  seven  different  com- 
panies, in  the  aggregate  $2,700,  one-fifteenth  of  which  was  in  the 
defendant  company.  The  evidence  tended  to  show  that  the  value 
of  the  building  at  the  time  of  the  fire  was  about  $1,200.  The  defendant 
concedes  that,  if  it  is  liable,  it  should  pay  its  proportionate  share  of 
the  true  value  of  the  building,  but  insists  that  it  is  not  bound  to  pay 
the  amount  specified  in  the  policy.  The  contract  of  insurance  was 
made  under  a  statute  which  declared  that  "  whenever  any  policy  of 
insurance  shall  be  written  to  insure  any  real  property,  and  the  prop- 
erty insured  shall  be  wholly  destroyed  without  criminal  fault  on  the 
part  of  the  insured  or  his  assigns,  the  amount  of  the  insurance  written 
in  such  policy  shall  be  taken  conclusively  to  be  the  true  value  of  the 
property  when  insured,  and  the  true  amount  of  loss  and  measure  of 
damages  when  destroyed."  (R.  S.,  sec.  1943.)  Under  this  statute  it 
is  settled  by  frequent  adjudications  that  the  actual  value  of  such  real 


134  LAW  AND  BUSINESS 

estate  when  insured  or  destroyed,  and  the  consequent  actual  loss  to 
the  insured,  is  wholly  immaterial.  Reilly  v.  Franklin  Insurance  Co., 
43  Wis.  449.  This  is  the  necessary  result  of  the  language  of  the  statute 
making  "the  amount  of  the  insurance  written  in  such  policy"  con- 
clusive between  the  parties  to  the  contract,  not  only  as  to  the  "true 
value  of  the  property  when  insured"  but  also  as  to  the  "true  amount 
of  loss  and  measure  of  damages  when  destroyed." 

The  statute  must  be  regarded  as  a  part  of  the  contract  of  insur- 
ance, and  the  amount  written  in  the  policy  as  liquidated  damages 
agreed  upon  by  the  parties  conclusively  in  such  contract.  The 
several  concurrent  policies  were  each  written  with  the  consent  of  the 
respective  companies.  This  being  so,  the  aggregate  amount  of  such 
insurance  written  in  the  several  policies  is  the  value  of  such  property  as 
stipulated  in  each  contract,  and  hence,  as  between  the  parties,  must  be 
regarded  as  conclusive,  not  only  as  to  the  "true  value  of  the  property 
when  insured,"  but  also  as  to  the  "  true  amount  of  loss  and  measure  of 
damages  when  destroyed."  This  must  be  so,  or  the  statute  would 
be  wholly  ineffectual  whenever  there  is  more  than  one  policy  on  the 
same  property.  And  this  is  so  notwithstanding  other  clauses  in  the 
policies  inconsistent  therewith.  The  result  is  that  the  exceptions 
to  such  portions  of  the  charge  as,  in  effect,  directed  the  jury  that  in 
case  they  found  the  building  to  have  been  wholly  destroyed,  then  the 
plaintiffs  were  entitled  to  recover  the  full  amount  written  in  the  policy, 

must  be  overruled. 

Judgment  affirmed. 
QUESTIONS 

1.  What  is  the  purpose  of  statutes  like  the  one  under  consideration  in  the 
principal  case  ?    Are  such  statutes  passed  for  the  benefit  of  the  insured 
or  the  insurer  ? 

2.  Would  the  decision  have  been  the  same  in  the  principal  case  if  it  had 
appeared  that  the  insured  had  intentionally  overstated  the  value  of 
the  property  insured  ? 

3.  What  constitutes  a  total  destruction  within  the  meaning  of  a  valued 
policy  ? 

4.  What  is  the  measure  of  recovery  under  a  valued  policy  when  the  loss  is 
partial  and  not  total  ? 

5.  P  owns  a  house  reasonably  worth  $10,000.     He  insures  the  property 
for  $8,000  in  each  of  three  different  companies.    The  house  is  destroyed 
by  fire,     (a)  May  he  recover  $8,000  from  each  of  the  three  companies  ? 
(&)  May  he  recover  $8,000.  from  any  one  of  the  three  companies  or  must 
he  proceed  against  each  company  for  one-third  of  the  amount  of  the 
insurance  ? 


DEVICES  FOR  SHIFTING  RISKS  13$ 

e)     Insurer's  Right  of  Subrogation 

PHOENIX  INSURANCE  COMPANY  v.  ERIE  TRANSPORTA- 
TION COMPANY 

117  United  States  Reports  312  (1885) 

GRAY,  J.  When  goods  are  wholly  lost,  actually  or  constructively, 
by  perils  insured  against,  the  insurer,  upon  payment  of  the  loss, 
doubtless  becomes  subrogated  to  all  the  assured's  rights  of  action 
against  third  persons  who  have  caused  or  are  responsible  for  the  loss. 
No  express  stipulation  in  the  policy  of  insurance,  or  abandonment  by 
the  assured,  is  necessary  to  perfect  the  title  of  the  insurer.  From  the 
very  nature  of  the  contract  of  insurance  as  a  contract  of  indemnity, 
the  insurer,  when  he  has  paid  to  the  assured  the  amount  of  the  indem- 
nity agreed  on  between  them,  is  entitled,  by  way  of  salvage,  to  the 
benefit  of  anything  that  may  be  received,  either  from  the  remnants 
of  the  goods,  or  from  damages  paid  by  third  persons  for  the  same 
loss.  But  the  insurer  stands  in  no  relation  of  contract  or  of  privity 
with  such  persons.  In  a  court  of  common  law,  it  can  only  be  asserted 
in  his  name,  and,  even  in  a  court  of  equity  or  admiralty,  it  can  only  be 
asserted  in  his  right.  In  any  form  of  remedy,  the  insurer  can  take 
nothing  by  subrogation  but  the  rights  of  the  assured.  That  the  right 
of  the  assured  to  recover  damages  against  a  third  person  is  not  inci- 
dent to  the  property  in  the  thing  insured,  but  only  a  personal  right  of 
the  assured,  is  clearly  shown  by  the  fact  that  the  insurer  acquires  a 
beneficial  interest  in  that  right  of  action,  in  porportion  to  the  sum 
paid  by  him,  not  only  in  the  case  of  a  total  loss,  but  likewise  in  the 
case  of  a  partial  loss,  and  when  no  interest  in  the  property  is  abandoned 
or  accrues  to  him. 

The  right  of  action  against  another  person,  the  equitable  interest 
in  which  passes  to  the  insurer,  being  only  that  which  the  assured  has, 
it  follows  that  if  the  assured  has  no  such  right  of  action,  none  passes 
to  the  insurer';  and  that  if  the  assured's  right  of  action  is  limited  or 
restricted  by  lawful  contract  between  him  and  the  person  sought  to 
be  made  responsible  for  the  loss,  a  suit  by  the  insurer,  in  the  right  of 
the  assured,  is  subject  to  like  limitations  or  restrictions. 

For  instance,  if  two  ships,  owned  by  the  same  person,  come  into 
collision  by  the  fault  of  the  master  and  crew  of  the  one  ship  and  to 
the  injury  of  the  other,  an  underwriter  who  has  insured  the  injured 
ship,  and  received  an  abandonment  from  the  owner,  and  paid  him 
the  amount  of  the  insurance  as  and  for  a  total  loss,  acquires  thereby 


136  LAW  AND  BUSINESS 

no  right  to  recover  against  the  other  ship,  because  the  assured,  the 
owner  of  both  ships,  could  not  sue  himeslf.  Simpson  v.  Thomson, 
3  A.C.  279. 

Upon  the  same  principle,  any  lawful  stipulation  between  the 
owner  and  the  carrier  of  the  goods,  limiting  the  risks  for  which 
the  carrier  shall  be  answerable,  or  the  time  of  making  the  claim, 
or  the  value  to  be  recovered,  applies  to  any  suit  brought  in  the  right 
of  the  owner,  for  the  benefit  of  his  insurer,  against  the  carrier;  as,  for 
instance,  if  the  contract  of  carriage  expressly  exempts  the  carrier  from 
liability  for  losses  by  fire;  York  Co.  v.  Central  Railroad,  3  Wall.  107; 
or  requires  claims  against  the  carrier  to  be  made  within  three  months ; 
Express  Co.  v.  Caldwell,  21  Wall.  264;  or  fixes  the  value  for  which  the 
carrier  shall  be  responsible;  Hart  v.  Pennsylvania  Railroad,  112  U.S. 
331.  So  the  stipulation,  not  now  in  controversy,  in  the  bills  of  lading 
in  the  present  suit,  making  the  value  of  the  goods  at  the  time  and 
place  of  shipment  the  measure  of  the  carrier's  liability,  would  control, 
although  in  the  absence  of  such  a  stipulation  the  carrier  would  be 
liable  for  the  value  at  the  place  of  destination,  as  held  in  Mobile  6° 
Montgomery  Railway  v.  Jurey,  in  U.S.  584. 


QUESTIONS 

1 .  What  is  meant  by  subrogation  ?    Why  is  the  insurer  subrogated  to  the 
rights  of  the  insured  ? 

2.  Through  X's  negligence,  P's  house  is  destroyed  by  fire.     P  recovers  the 
loss  from  X  because  of  his  negligence.    After  getting  satisfaction  of 
his  judgment  against  X,  he  brings  an  action  against  the  insurer  on  this 
policy.    What  decision  ? 

3.  The  insurance  company  pays  P  the  full  amount  of  the  loss.    X,  with 
knowledge  of  this  payment,  pays  P  an  amount  in  settlement  of  the 
claim  against  him  and  receives  from  P  a  release  from  further  liability. 
What  are  the  rights  of  the  insurer  under  these  circumstances  ? 

4.  P's  house  is  destroyed  by  the  negligence  of  X.     The  insurer  pays  the 
loss.    P  thereupon  enters  into  a  contract  with  X  by  which  he  agrees 
to  release  X  from  liability  for  his  negligence.    What  are  the  rights  of 
the  insurer  against  X  under  these  circumstances  ? 

5.  P  delivers  goods  to  a  carrier  to  be  shipped  from  X  to  Y.    In  the  bill  of 
lading  there  is  a  stipulation  that  the  railway  company  shall  be  entitled 
to  all  insurance  on  the  goods  in  the  event  of  their  loss  or  destruction. 
The  goods  are  lost  in  transit.     The  insurer  settles  with  P  and  brings  an 
action  against  the  carrier.    What  decision  ? 


DEVICES  FOR  SHIFTING  RISKS  137 

6.  X  insured  his  life  for  $5,000  in  favor  of  W,  his  wife.    X  met  his  death 
through  the  negligence  of  D.    The  insurer  paid  the  loss  to  W  and  brought 
an  action  against  D  for  $5,000.    What  decision  ? 

7.  X  insures  himself  with  P  against  accidents.    He  is  injured  through  D's 
negligence.    P  settles  with  X.    What  are  P's  rights,  if  any,  against 
D? 

CASTELLAIN  v.  PRESTON 
Law  Reports  n  Queen's  Bench  Division  380  (1883) 

Defendants,  being  owners  of  certain  buildings,  effected  insurance 
on  them  with  the  Liverpool  and  London  and  Globe  Insurance  Com- 
pany. Some  months  later  the  defendants  contracted  to  sell  the 
buildings  and  land  on  which  they  stood,  to  Rayner,  a  tenant,  for 
£3,100.  Later  on  the  buildings  were  damaged  by  a  fire  to  the  extent 
of  £330  which  the  insurance  company  paid  to  defendants.  After- 
ward Rayner  accepted  a  conveyance  to  the  property  and  paid  the 
full  purchase  price.  This  is  an  action  by  plaintiff  on  behalf  of  the 
company  for  the  £330.  In  a  trial  before  CHITTY,  J.,  judgment  was 
given  for  the  defendants. 

COTTON,  L.  J.  In  this  case  the  appellant's  company  insured 
a  house  belonging  to  the  defendants,  and  before  there  was  any  loss 
by  fire  the  defendants  sold  the  house  to  certain  purchasers.  After- 
ward there  was  a  fire,  and  an  agreed  sum  was  paid  by  the  insurance 
office  to  the  defendants  in  respect  to  the  loss.  The  appellant  appar- 
ently seeks  to  recover  the  sum  which  the  office  paid  to  the  defendants, 
and  if  the  plaintiff's  claim  could  be  shaped  only  in  this  form,  I  think 
my  opinion  would  be  against  him.  The  plaintiff's  claim  may  be 
treated  in  substance  in  another  way,  namely,  the  company  seeks  to 
obtain  the  benefit,  either  wholly  or  partly,  of  the  amount  paid  by 
them  out  of  the  purchase  money  which  the  defendants  have  received 
since  the  fire  from  the  purchasers.  In  my  opinion,  the  plaintiff  is  right 
in  that  contention.  I  think  that  the  question  turns  on  the  considera- 
tion of  what  a  policy  of  insurance  against  fire  is,  and  on  what  the  right 
of  the  plaintiff  depends.  The  policy  is  really  a  contract  to  indemnify 
the  person  insured  for  the  loss  which  he  has  sustained  in  consequence 
of  the  peril  insured  against,  which  has  happened,  and  from  that  it 
follows,  of  course,  that  as  it  is  only  a  contract  of  indemnity,  it  is  only 
to  pay  that  loss  which  the  assured  may  have  sustained  by  reason  of 
the  fire  which  has  occurred.  In  order  to  ascertain  what  that  loss  is, 
everything  must  be  taken  into  account  which  is  received  by  and 


138  LAW  AND  BUSINESS 

comes  to  the  hand  of  the  assured,  and  which  diminishes  that  loss. 
It  is  only  the  amount  of  the  loss,  when  it  is  considered  as  a  contract 
of  indemnity,  which  is  to  be  paid  after  taking  into  account  and  estimat- 
ing those  benefits  or  sums  of  money  which  the  assured  may  have 
received  in  the  diminution  of  the  loss.  If  the  proposition  is  stated  in 
that  manner  it  is  clear  that  the  office  would  be  entitled  to  the  benefit 
of  anything  received  by  the  assured  before  the  time  when  the  policy 
is  paid,  and  it  is  established  by  the  case  of  Darrell  v.  Tibbitts,  5  Q.B.D. 
560,  that  the  insurance  company  is  entitled  to  that  benefit,  whether 
or  not  before  they  pay  the  money  they  insist  upon  that  calculation 
being  made  of  what  can  be  recovered  in  diminution  of  the  loss  by 
the  assured;  if  they  do  not  insist  upon  that  calculation  being  made, 
and  if  it  afterward  turns  out  that  in  consequence  of  something  which 
ought  to  have  been  taken  into  account  in  estimating  the  loss,  a  sum 
of  money,  or  even  a  benefit  not  being  a  sum  of  money,  is  received,  then 
the  office,  notwithstanding  the  payment  made,  is  entitled  to  say  that 
the  assured  is  to  hold  that  for  its  benefit,  and  although  it  was  not 
taken  into  account  in  ascertaining  the  sum  which  was  paid,  yet  when 
it  has  been  received  it  must  be  brought  into  account,  and  if  it  is  not 
a  sum  of  money,  but  a  benefit  that  has  been  received,  its  value  must 
be  estimated  in  money. 

Now  LORD  BLACKBURN,  in  the  case  of  Burnard  v.  Rodocanochi, 
7  App.  Cas.  339,  states  the  principle  in  these  words:  "The  general 
rule  of  law  (and  it  is  obvious  justice)  is  that  where  there  is  a  contract 
of  indemnity  (it  matters  not  whether  it  is  a  marine  policy  or  a  policy 
against  fire  on  land  or  any  other  contract  of  indemnity),  and  a  loss 
happens,  anything  which  reduces  or  diminishes  the  loss  comes  into 
the  hands  of  the  person  to  whom  he  has  paid  it,  it  becomes  an  equity 
that  the  person  who  has  already  paid  the  full  indemnity  is  entitled 
to  be  recouped  by  having  that  amount  back."  In  Darrell  v.  Tibbitts, 
to  which  I  have  already  referred,  the  question  which  we  have  to 
consider  was  whether  the  insurance  office  was  entitled  to  the  benefit 
produced  in  consequence  of  a  covenant  to  repair  if  the  building  should 
be  damaged  by  an  explosion  of  gas.  In  my  opinion,  it  was  not 
intended  in  any  way  to  limit  the  right  of  the  insurer,  as  an  insurer,  to 
cases  where  the  contract  in  respect  of  which  benefit  had  been  received 
related  to  the  same  loss  or  damage  as  that  against  which  the  contract 
of  indemnity  was  created  by  the  policy.  That  was  what  was  before 
this  court  in  that  case,  and  undoubtedly  expressions  do  occur  as  to  a 
contract  relating  to  the  loss  or  affecting  the  loss;  but  the  principle  was 


DEVICES  FOR  SHIFTING  RISKS  139 

not  limited  to  contracts.  The  principle  which  I  have  enunciated  goes 
further,  and  if  there  is  a  money  or  any  benefit  received  which  ought 
to  be  taken  into  account  in  diminishing  the  loss  or  in  ascertaining 
what  the  real  loss  is  against  which  the  contract  of  indemnity  is  gives, 
the  indemnifier  ought  to  be  allowed  to  take  advantage  of  it  in  order 
to  calculate  what  the  real  loss  is,  even  although  the  benefit  is  not  a 
contract  or  right  of  suit  which  arises  and  has  its  birth  from  the  acci- 
dent insured  against.  Of  course,  the  difficulty  is  to  consider  what 
ought  to  be  taken  into  account  in  estimating  that  loss  against  which 
the  insurer  has  agreed  to  indemnify,  and  we  have  been  pressed  in 
argument  with  many  difficulties.  One  which  possibly  was  put  to 
us  most  strongly,  was  that  the  contract  of  sale  has  nothing  to  do 
with  destruction  by  fire,  and  if  any  part  of  the  purchase  money  is  to 
be  taken  into  account,  why  is  a  gift  not  to  be  taken  into  account? 
That  may  be  said  to  diminish  the  loss  as  well  as  a  contract  of  sale. 
The  answer  is  that  when  a  gift  is  made  afterward  in  order  to  dimin- 
ish the  loss,  it  is  bestowed  in  such  terms  as  to  show  an  intention  to  bene- 
fit the  assured,  and  to  give  the  insurer  the  benefit  of  that  would  be  to 
divert  the  gift  from  its  intended  object  to  a  different  person.  That 
really  was  what  was  decided  in  Burnard  v.  Rodocanochi.  There  the 
money  bestowed,  not  as  a  matter  of  right,  but  as  a  gift,  was  intended 
to  benefit  the  assured  beyond  the  amount  which  they  had  got  in  conse- 
quence of  any  insurance.  There  is  another  ground  which  may  possibly 
exclude  gifts.  It  may  be  that  the  right  of  the  insurer  to  have  a  sum 
brought  into  account  in  diminution  of  the  loss,  against  which  he  has 
given  a  contract  of  indemnity,  is  confined  to  that  which  is  a  right 
or  other  incident  belonging  to  the  person  insured,  as  an  incident  of  the 
property  at  the  time  when  the  loss  takes  place.  This  definition 
would  not  include  a  sum  subsequently  bestowed  on  the  assured  by 
way  of  gift,  for  it  can  in  no  way  be  said  to  have  been  appertaining  to 
him  as  owner  of  the  property  at  the  time  when  the  loss  took  place. 
But,  in  the  present  case,  what  we  have  to  consider  is  whether  the 
contract  of  sale  is  not  an  incident  of  the  property,  belonging  to  the 
owners  at  the  time  of  the  loss  in  such  a  way  that  it  ought  to  be  brought 
'into  account  in  estimating  the  loss,  against  which  the  insurer  has 
undertaken  to  indemnify.  What  was  the  position  of  the  parties? 
The  defendant's  house  was  insured,  and  there  was  a  loss  from  fire, 
the  damage  caused  by  the  fire  being  estimated  by  the  parties  at 
£330.  Ultimately,  the  property  having  been  already  agreed  to  be 
sold  at  a  fixed  price,  the  assured  received  the  whole  amount  of  that 


140  LAW  AND  BUSINESS 

price.  Now  they  did  that  in  respect  of  a  contract  relating  to  the  sub- 
ject insured,  the  house;  and,  to  my  mind,  if  they  received  the  whole 
amount  of  the  price  which  they  previously  had  fixed  as  the  value 
of  the  house,  that  must  of  necessity  be  brought  into  account  when 
it  was  received,  for  the  purpose  of  ascertaining  what  was  the  ulti- 
mate loss  against  which  they  had  concluded  a  contract  of  indem- 
nity with  the  insurance  office.  Here  the  purchasers  have  paid  the 
money  in  full  and  as  the  property  was  valued  between  the  vendors 
and  the  purchasers  at  £3,100,  the  vendors  got  that  sum  in  respect  of 
that  which  had  been  burned,  but  which  had  not  been  burned  at  the 
time  when  the  contract  was  entered  into.  They  had  fixed  that  to  be 
the  value,  and  then  any  money  which  they  got  from  the  purchasers, 
and  which  together  with  £330,  the  sum  paid  by  the  office,  exceeds 
the  value  of  the  property  as  fixed  by  them  under  the  contract  to  sell, 
must  diminish,  and  in  fact  entirely  extinguishes  the  loss  occasioned 
to  the  vendors  of  the  property  by  the  fire. 

Therefore,  though  it  cannot,  to  my  mind,  be  said  that  the  insurers 
are  entitled,  because  the  purchase  is  completed,  to  get  back  the  money 
which  they  have  paid,  yet  they  are  entitled  to  take  into  account  the 
money  subsequently  received  under  a  contract  for  the  sale  of  the  prop- 
erty existing  at  the  time  of  the  loss,  in  order  to  see  what  the  ulti- 
mate loss  was  against  which  they  gave  their  contract  of  indemnity. 
On  the  principle  of  Darrell  v.  Tibbitts,  when  the  benefit  afterward 
accrued  by  the  completion  of  the  purchase,  the  insurance  company 
were  entitled  to  demand  that  the  money  paid  by  them  should  be 
brought  into  account.  Therefore  the  conclusion  at  which  I  have 
arrived  is,  that  if  the  purchase  money  has  been  paid  in  full,  the 
insurance  office  will  get  back  that  which  they  have  paid,  on  the 
ground  that  the  subsequent  payment  of  the  price  which  had  been 
before  agreed  upon,  and  the  contract  for  payment  of  which  was  exist- 
ing at  the  time,  must  be  brought  into  account  by  the  assured  because 
it  diminishes  the  loss  against  which  the  insurance  office  merely  under- 
took to  indemnify  them.  In  my  opinion,  therefore,  the  decision 
below  was  erroneous.  I  think  CHITTY,  J.,  based  it  upon  this,  that 
in  this  case  there  was  no  right  of  subrogation,  no  contract  which  the 
office  could  have  insisted  upon  enforcing  for  their  benefit.  I  think 
it  immaterial  to  decide  that  question,  because  the  vendors  have 
exercised  their  right  to  insist  upon  the  completion  of  the  purchase. 

Judgment  reversed. 


DEVICES  FOR  SHIFTING  RISKS  141 

QUESTIONS 

1.  Why  should  the  insurer  have  been  entitled  to  the  £330?    Had  it  not 
been  fully  compensated  for  carrying  the  risk  ? 

2.  If  you  are  of  the  opinion  that  the  insurer  should  not  have  been  decree_d 
the  £330,  how  should  the  amount  be  disposed  of  ? 

3.  Suppose  that  the  father  of  the  defendant  had  given  him  £330  to  cover 
the  loss,  would  the  insurer  have  been  entitled  to  this  sum  ? 

4.  Can  this  case  be  reconciled  with  the  case  of  Foley  v.  The  Insurance 
Company,  supra,  p.  30  ? 

5.  X  mortgaged  his  house  to  P  to  secure  a  debt  of  $5,000.    P  immediately 
insured  the  building  for  that  amount  to  secure  the  debt.    The  house 
burned  and  P  recovered  the  full  loss  from  the  insurer.    What  are  the 
rights  of  the  insurer  against  X,  the  mortgagor  ? 

6.  In  the  foregoing  case,  P,  after  having  received  the  $5,000  from  the 
insurer,  proceeds  against  X  to  foreclose  the  mortgage  and  to  collect 
the  mortgage  debt  from  him.    What  decision  ? 


LAW  AND  LABOR 


CHAPTER   I 
INTRODUCTORY  TOPICS 


Another  group  of  problems  which  the  business  man  must  face 
arises  in  connection  with  the  administration  and  control  of  his  labor. 
Any  person  engaged  in  a  business  enterprise,  in  the  conduct  of  which 
he  must  rely  upon  a  representative  or  representatives  for  the  per- 
formance of  a  part  of  his  activities,  is,  to  the  extent  of  such  reliance, 
an  employment  manager  and  to  the  same  extent  confronted  by  labor 
problems.  Obviously  enough  these  problems  will  be  more  acute  and 
more  numerous  in  some  businesses  than  in  others;  but  the  fact 
remains  that  in  all  businesses,  in  a  greater  or  less  degree,  labor 
problems  arise  and  demand  solution. 

A  great  many  factors  of  diverse  character  are  involved  in  the 
successful  administration  of  labor,  factors  which,  for  the  most  part, 
lie  outside  the  scope  of  our  present  inquiry.  The  important  fact  to 
which  the  student's  attention  is  called  in  this  connection  is  that  the 
whole  problem  of  labor  administration  is  shot  through  and  through 
with  legal  considerations  which  the  wise  business  administrator  can- 
not afford  to  ignore.  His  policies  and  practices  in  administration 
will  to  a  very  large  extent  be  guided,  and  in  many  cases,  dictated  by 
these  legal  considerations.  It  is  our  purpose  here  to  consider  some 
of  the  more  significant  legal  aspects  of  the  business  administrator's 
relation  to  labor  and  labor  employment.  The  law  pertaining  to 
labor  is  so  extensive  and  complicated  that  the  most  we  can  reasonably 
hope  to  do  is  to  open  the  field  and  master  some  of  the  fundamental 
principles. 

In  the  first  place,  it  is  necessary  to  consider  the  relation  of 
employer  and  employee  or,  as  it  is  known  under  the  common  law, 
the  relation  of  master  and  servant.  On  the  one  hand,  there  is  the 
problem  of  the  contract  of  employment  between  the  employer  and 
the  employee;  and  on  the  other,  there  is  the  problem  of  the  liability 
of  the  employer  for  injuries  received  by  his  employee  in  the  course 
of  his  employment. 


146  LAW  AND  BUSINESS 

The  common  law  courts  entertained  a  high  regard  for  freedom  of 
contract.  They  hesitated,  except  in  rare  instances,  to  interfere  with 
any  contract  entered  into  by  parties  of  full  age  and  of  sound  mind. 
Accordingly,  they  enforced  all  contracts  of  employment,  however 
harshly  such  contracts  might  operate  on  employees,  unless  assent 
thereto  was  secured  by  unfair  means,  such  as  fraud  or  duress  of 
person.  They  proceeded  upon  the  assumption,  and  perhaps  in  the 
beginning  that  assumption  was  justifiable,  that  there  was  economic 
equality  between  employer  and  employee.  They  refused  to  recognize 
that  employers  had  a  substantial  advantage  in  bargaining  and  that 
they  could  bring  to  bear  upon  employees  duress  just  as  real  and  com- 
pelling as  duress  of  person.  So  in  general  it  may  be  said  that  the 
courts  of  common  law  pursued  a  strict  policy  of  non-interference 
with  employers  and  employees  in  the  making  of  their  contracts 
of  employment. 

Even  if  the  courts  had  adopted  the  view  that  contracts  of  employ- 
ment induced  by  economic  duress  were  against  sound  public  policy, 
they  did  not  possess  adequate  means  for  enforcing  such  a  view.  The 
courts  had  no  administrative  machinery  for  enforcing  new  standards 
by  constant  control  and  supervision.  Nor  had  they  developed  the 
principle  that  the  making  of  a  contract  against  public  policy  is 
punishable  as  a  crime.  In  fact  the  common  law  courts  possessed  no 
power  to  discourage  such  contracts  other  than  by  refusing  to  enforce 
them.  A  policy  of  non-enforcement  of  unfair  contracts  of  employ- 
ment would  have  been  highly  ineffective  in  establishing  and  main- 
taining an  equal  bargaining  relation  between  employer  and  employee, 
for  even  if  the  courts  had  permitted  the  employee  to  avoid  such  a 
contract,  the  worker's  position  would  not  have  been  materially 
bettered;  he  would  in  all  probability  have  been  compelled  to  accept 
the  same  or  similar  employment  under  still  more  harsh  terms.  If 
therefore  the  courts  had  assumed  the  power  to  formulate  new 
standards,  based  upon  the  inequality  of  the  bargaining  relation 
between  employer  and  employee,  they  would  not  have  had  adequate 
means  for  enforcing  them. 

In  the  course  of  time,  with  the  tremendous  growth  of  our  industrial 
system,  with  its  increasing  complexity  and  with  its  far-reaching 
hazards,  three  things  became  perfectly  clear:  that  workers  were  not 
on  an  equal  bargaining  plane  with  their  employers;  that  new  bases 
for  contracts  of  employment  had  to  be  established;  and  that  machin- 
ery, more  adequate  than  that  available  in  courts  of  common  law, 
had  to  be  set  up  for  the  enforcement  of  the  new  standards. 


INTRODUCTORY  TOPICS  147 

Legislatures  within  recent  times  set  about  to  equalize  the  bargain- 
ing relation  between  employer  and  employee  and  in  so  doing  have  to 
a  considerable  extent  narrowed  the  freedom  of  contract  which  the 
courts  of  common  law  regarded  so  highly.  They  have  passed  Jaws 
regulating  child  labor,  woman  labor,  hours  and  places  of  work,  wages, 
and  numerous  other  matters  which  were  formerly  regulated  almost 
entirely  by  agreement  of  the  parties  concerned.  In  other  words,  they 
have  taken  from  the  employer  and  employee  the  power  to  decide  for 
themselves  many  questions  of  common  interest  and  set  up  standards 
which  the  parties  cannot  ignore  in  their  dealings  with  each  other. 
Moreover,  legislatures  have  created  new  agencies,  such  as  labor 
inspectors,  factory  inspectors,  and  industrial  boards,  to  see  that 
these  standards  are  observed  and  have  provided  appropriate  punish- 
ment for  those  who  do  not  observe  them. 

"Due  process  of  law"  is  the  obstacle  which  legislatures  most  fre- 
quently encounter  in  passing  laws  regulating  the  contract  of  employ- 
ment. This  obstacle  is  found  in  the  Fourteenth  Amendment  to  the 
Federal  Constitution  which  provides  that  no  state  shall  deprive  a 
" person  of  life,  liberty,  or  property,  without  due  process  of  law"',  it 
is  also  found  in  the  Fifth  Amendment  as  a  limitation  upon  Congress. 
Due  process  of  law  in  this  connection  means  that  the  liberty  or  free- 
dom to  contract  is  not  to  be  interfered  with  by  law-making  bodies  unless 
there  are  good  reasons  for  such  interference;  and  not  even  then,  if 
such  interference  is  unreasonable.  It  means  that  all  parties  concerned 
are  entitled  to  fair  treatment  according  'to  the  prevailing  social  and 
economic  sense  of  the  community  as  interpreted  by  legislatures  and 
ratified  by  courts.  Due  process  is  therefore  accorded  by  laws  regulat- 
ing the  contract  of  employment,  if  they  are  really  necessary  for  the 
protection  of  the  working  class  and  if  they  are  not  unreasonable  in 
view  of  the  object  to  be  accomplished  by  them. 

The  principles  of  the  common  law  with  respect  to  the  liability  of 
the  master  for  injuries  sustained  by  the  servant  in  the  course  of  his 
employment  proved  to  be  quite  as  unsatisfactory  in  a  changing 
society  as  the  rules  with  regard  to  freedom  of  contract.  The  common 
law  doctrines  of  liability  originated  for  the  most  part  at  a  time  when 
industry  was  relatively  small,  when  industrial  hazards  were  neither 
numerous  nor  serious,  and  when  capital  was  timid  and  needed 
encouragement.  It  is  not  surprising  therefore  that  these  common 
law  principles  should  have  failed  utterly  to  meet  the  needs  of  a  modern, 
large-scale  industry.  And  to  the  extent  that  these  doctrines  of  the 
common  law  failed,  legislatures  have  been  forced  to  create  new  bases 


148  LAW  AND  BUSINESS 

of  liability,  fundamentally  different  from  those  which  the  courts  of 
common  law  recognized  and  enforced. 

Our  next  task,  therefore,  in  considering  the  relation  of  employer 
and  employee,  will  be  to  examine  briefly  the  liability  of  the  master 
for  injuries  sustained  by  the  servant  in  the  course  of  his  employment. 
We  shall  first  consider  the  doctrines  of  the  common  law  and  see  how 
far  and  why  these  doctrines  failed  to  meet  the  needs  of  a  modern, 
industrial  regime;  and  in  the  second  place  we  shall  look  at  some  typical 
legislation  which  supplants  much  of  the  common  law  and  sets  up  new 
bases  of  liability. 

The  final  topic  for  consideration  in  the  law  relating  to  labor 
deals  with  competitive  practices  in  what  has  been  aptly  termed  the 
labor  market.  The  employer  of  labor  will  find  himself  in  competition 
with  rival  employers  for  labor;  he  will  find  himself  in  competition 
with  his  employees  and  prospective  employees  with  respect  to  terms 
of  employment;  and  he  will  find  that  his  business  all  too  frequently 
is  affected  by  competitive  practices  between  rival  organizations  of 
labor  struggling  for  supremacy. 

Our  concern  in  this  connection  is  to  determine  as  far  as  is  possible 
the  attitude  of  the  courts  in  passing  upon  the  legality  of  these  various 
competitive  struggles.  It  has  been  said  that  the 

Underlying  right  which  seems  to  be  coming  into  general  recognition 
as  the  subject  of  protection  by  courts  of  equity,  through  the  instrumentality 
of  an  injunction,  appears  to  be  the  right  to  enjoy  a  certain  free  and  natural 
condition  of  the  labor  market,  which,  in  a  recent  case  in  the  House  of 
Lords,  was  referred  to,  in  the  language  of  Lord  ELLENBOROUGH,  as  a  "prob- 
able expectancy."  This  underlying  right  has  otherwise  been  broadly 
defined  or  described  as  the  right  which  every  man  has  to  earn  his  living,  or 
to  pursue  his  trade  or  business,  without  undue  interference,  and  might 
otherwise  be  described  as  the  right  which  every  man  has,  whether  employer 
or  employee,  of  absolute  freedom  to  employ  or  be  employed.  The  peculiar 
element  of  this,  perhaps,  newly  recognized  right,  is  that  it  is  an  interest 
which  one  man- has  in  the  freedom  of  another.  A  large  part  of  what  is 
most  valuable  in  modern  life  seems  to  depend  more  or  less  directly  upon 
"probable  expectancies."  When  they  fail,  civilization,  as  at  present 
organized,  may  go  down.  As  social  and  industrial  life  develops  and  grows 
more  complex  these  "probable  expectancies"  are  bound  to  increase.  It 
would  seem  to  be  inevitable  that  courts  of  law,  as  our  system  of  jurispru- 
dence is  evolved  to  meet  the  growing  wants  of  an  increasingly  complex 
social  order,  will  discover,  define,  and  protect  from  undue  interference  more 
of  these  "probable  expectancies."  It  is  freedom  in  the  market,  freedom 


INTRODUCTORY  TOPICS  149 

in  the  purchase  and  sale  of  all  things,  including  both  goods  and  labor,  that 
our  modern  law  is  endeavoring  to  insure  to  every  dealer  on  either  side  of 
the  market.1 

Assuming  that  both  employer  and  employee  have  an  interest  in 
a  free  labor  market,  and  that  each  is  entitled  to  legal  protection  of 
his  "probable  expectancies,"  certain  questions  naturally  arise  for 
consideration.  What  constitutes  undue  interference  with  the  freedom 
of  the  market?  How  far  may  an  employer  go  in  securing  labor  as 
against  a  rival  employer?  How  far  may  an  employer  go  in  forcing 
his  conditions  of  employment  upon  the  employee  ?  How  far  may  the 
employee  go  in  imposing  his  terms  upon  the  employer  ?  In  answering 
these  questions,  the  courts  have  usually  approached  them  in  terms  of 
the  objects  sought  and  the  means  used.  What  is  the  object  sought  ? 
Is  it  legitimate  ?  Is  it  worthy  of  legal  protection  ?  What  are  the  means 
used  in  accomplishing  the  object  ?  Are  they  fair  and  reasonable  to 
all  concerned  ?  If  the  means  used  are  unreasonable  and  illegal,  it  is 
immaterial  that  the  object  sought  is  legitimate.  If  the  object  sought 
is  illegal,  the  practices  are  illegal  regardless  of  the  reasonableness  of 
the  means  used. 

Within  recent  times  the  working  classes  have  manifested  consider- 
able dissatisfaction  with  the  existing  state  of  the  law  with  respect  to 
the  legality  of  their  bargaining  practices.  They  claim  that  the  use 
of  the  injunction  as  a  weapon  by  the  employing  class  is  not  only  unfair 
but  historically  inappropriate;  that  too  much  power  is  vested  in  the 
courts  to  declare  organizations  of  labor  malicious  combinations;  that 
many  practices,  which  ought  to  be  justifiable  because  they  are  the 
natural  outgrowth  of  trade  competition,  are  condemned  as  illegal 
because  done  for  a  "purpose  which  a  judge"  considers  "socially 
and  economically  harmful";  and  that,  "due  largely  to  environ- 
ment, the  social  and  economic  ideas  of  judges,"  which  thus  become 
"translated  into  law,"  are  "prejudicial  to  a  position  of  equality 
between  workingman  and  employer."  In  concluding  the  discussion 
of  the  law  relating  to  labor  some  attention  must  therefore  be  given 
to  legislation  which  has  resulted  from  this  dissatisfaction  and  which  is 
"designed  to  equalize  before  the  law  the  position  of  workingman  and 
employer  as  industrial  combatants."2 

1  Jersey  City  Printing  Co.  v.  Cassidy,  63  N  J.  Equity,  759. 

2  See  dissenting  opinion  of  JUSTICE  BRANDEIS,  in  the  case  of  the  Duplex 
Printing  Co.  v.  Deering,  254  United  States  Reports,  443,  484,  485. 


CHAPTER  II 

THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE 
i.     The  Contract  of  Employment 

JOHNSTON  v.  FARGO 
184  New  York  Reports  379  (1906) 

GRAY,  J.  The  plaintiff,  while  in  the  employment  of  the  American 
Express  Company,  the  defendant,  sustained  personal  injuries,  for 
which  he  has  recovered  this  judgment  in  the  Municipal  Court  of  the 
City  of  Syracuse;  which  has  been  affirmed  by  the  County  Court  of 
Onondaga  County  and  by  the  Appellate  Division  of  the  Supreme 
Court,  in  the  fourth  department.  The  latter  court  was  divided  in 
opinion  and  has  permitted  the  defendant  to  appeal  to  this  court, 
upon  the  ground  that  there  was  a  question  of  law  in  the  case,  which 
ought  to  be  reviewed  by  us.  The  injuries  were  occasioned  by  the 
plaintiff's  falling  with  an  elevator,  in  the  barn  of  the  express  company 
while  it  was  being  used  for  carrying  down  some  vehicles,  and  the 
complaint  charges  that  it  was  in  a  defective  condition  and  that  the 
occurrence  was  due  to  the  negligence  of  the  defendant.  The  evidence 
upon  the  trial  was  such  as  to  raise  questions  of  fact,  as  to  the  negligence 
of  the  defendant  and  as  to  the  contributory  negligence  of  the  plaintiff, 
and  these  questions  were  properly  submitted  by  the  trial  court  for 
the  determination  of  the  jury.  They  demand  no  further  considera- 
tion by  us.  The  one  question  for  discussion  upon  this  appeal  is  the 
sufficiency  of  the  defense  made  by  the  company  upon  an  agreement? 
which  the  plaintiff,  upon  entering  the  defendant's  employment, 
executed  and  delivered  to  it.  It  was  in  these  words: 

I  do  further  agree,  in  consideration  of  my  employment  by  said  American 
Express  Company,  that  I  will  assume  all  risks  of  accident  or  injury  which  I 
shall  meet  with  or  sustain  in  the  course  of  such  employment,  whether  occa- 
sioned by  the  negligence  of  said  company,  or  any  of  its  members,  officers, 
agents,  or  employees,  or  otherwise;  and  that,  in  case  I  shall  at  any  time 
suffer  any  such  injury,  I  will  at  once  execute  and  deliver  to  said  company 
a  good  and  sufficient  release,  under  my  hand  and  seal,  of  all  claims,  demands, 
and  causes  of  action,  arising  out  of  such  injury  or  connected  therewith,  or 
resulting  therefrom,  and  I  hereby  bind  myself,  my  heirs,  executors  and 

150 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE     151 

administrators  with  the  payment  to  said  express  company,  on  demand,  of 
any  sum  which  it  may  be  compelled  to  pay  in  consequence  of  any  such 
claim,  or  in  defending  the  same,  including  all  counsel  fees  and  expenses  of 
litigation  connected  therewith. 

In  submitting  the  case  to  the  jury,  the  trial  judge  charged  as 
follows,  with  respect  to  this  defense:  "There  is  a  clause  in  the  con- 
tract which  provides  that  the  plaintiff  shall  release  the  defendant  from 
any  injuries  which  he  might  suffer  by  reason  of  the  negligence  of  the 
defendant.  I  shall  hold  as  a  matter  of  law  that  that  clause  in  that 
contract  is  void  as  being  without  consideration  and  as  against  public 
policy."  At  the  Appellate  Division  the  judgment  was  upheld,  on 
this  point,  upon  the  ground  that  the  agreement  was  contrary  to  public 
policy,  and,  therefore,  invalid,  and  JUSTICE  HISCOCK,  who  delivered 
the  opinion  of  the  court,  has  presented  the  reasoning  in  support  of 
that  view  very  fully  and  ably. 

The  question  is  one  upon  which  this  court  has  not  pronounced 
itself,  and  it  is  of  considerable  importance,  touching  as  it  does  the 
principle  of  freedom  of  contract.  In  the  case  of  Purdy  v.  R.W.& 
0.  Railroad  Co.  (125  N.Y.  209),  such  a  contract  to  release  the  employer 
from  liability  for  injury  through  negligence  was  involved;  but  it  was 
held  to  have  been  void  for  being  without  the  support  of  any  considera- 
tion. It  was  said  that  no  intimation  was  intended  that  it  would  have 
been  valid,  if  there  had  been  a  consideration  for  it,  and  that  "it  might 
even  then  be  urged  that  public  policy  forbids  the  exaction  of  such  a 
contract  from  its  employees  by  railroad  and  other  corporations  and 
upon  that  question  we  desire  to  express  no  opinion  at  the  present 
time."  In  Kenney  v.  N.Y.C.&  H.R.  Railroad  Co.  (125  N.Y.  422),  the 
contract  for  exemption  from  liability  was  between  the  defendant  and 
the  plaintiff's  employer,  an  express  company,  under  which  the  former 
sought  to  defeat  the  plaintiff's  action.  This  question  was  not  passed 
upon;  nor  was  it  in  the  case  of  Dowd  v.  N.Y.,  O.&  W.  Railway  Co. 
(170  N.Y.  459),  which  involved  the  proposition  of  the  implied  assump- 
tion by  the  employee  of  the  risks  incident  to  the  employment. 

The  question  of  the  validity  of  such  a  contract  between  an 
employer  and  a  person  in  his  employment,  as  affected  by  reasons  of 
public  policy,  it  must  be  conceded,  is  a  debatable  one.  In  support 
of  the  right  to  make  the  agreement  we  have  respectable  authority 
in  decisions  of  the  courts  of  England  and  of  the  state  of  Georgia. 
(Griffiths  v.  Earl  of  Dudley,  L.R.  9  Q.B.  Div.  357;  Western,  etc., 


152  LAW  AND  BUSINESS 

Railroad  Co.  v.  Bishop,  50  Ga.  465;  Same  Co.  v.  Strong,  52  Ga.  461.) 
The  great  weight  of  authority  in  decisions  of  the  courts  of  the  various 
states,  however,  sustains  the  view  that  such  an  agreement  is  contrary 
to  public  policy.  (L.S.&  M.S.  Railway  Co.  v.  Spangler,  44  Ohio  St. 
471;  K.P.  Railway  Co.  v.  Peavey,  29  Kan.  169;  Willis  v.  G.T,  Railway 
Co.,  62  Me.  488;  L.R.&F.S.  Railway  Co.  v.  Eubanks,  48  Ark.  466; 
R.&D.  Railroad  Co.  v.  Jones,  92  Ala.  218;  Maney  v.  C.B.&Q. 
Railroad  Co.,  49  111.  App.  105;  M.N.,  etc.,  Co.  v.  Eifert,  15  Ky.  L.R. 
575;  Blanton  v.  Dold,  109  Mo.  64;  Johnson  v.  R.&  D.  Railroad  Co., 
86  Va.  975.)  The  preponderance  of  authority  adverse  to  the  validity 
of  such  contract  is  such  as  greatly  and  properly  influences  our  view 
of  the  question.  In  Griffiths  v.  Earl  of  Dudley  (supra),  where  such  an 
agreement  was  held  to  be  quite  consistent  with  public  policy,  the 
view  of  the  English  court  as  expressed  by  JUSTICE  FIELD,  was  that 
"The  interest  of  the  employed  only  would  be  affected,"  and  not 
that  of  "all  society,"  and  "that  workmen,  as  a  rule,  were  perfectly 
competent  to  make  reasonable  bargains  for  themselves."  It  is  to  be 
observed,  however,  with  respect  to  the  situation  in  England,  that 
subsequently,  in  1897,  an  act  of  Parliament  was  passed,  entitled 
"The  Workingmen's  Compensation  Act,"  which,  in  effect,  declares 
the  public  policy  of  the  state.  By  that  act,  in  reality,  though  not 
in  form,  the  right  of  the  workingman  to  contract  away  his  right  to 
recover  compensation  from  his  employer  is  nullified,  inasmuch  as 
such  a  contract  is  only  valid  when,  as  between  employer  and  employed, 
there  exists  a  general  scheme  for  compensation,  which  secures  to  the 
workingman  benefits  as  great  as  those  he  would  derive  from  a  proceed- 
ing under  the  Compensation  Acts. 

Contracts  are  illegal  at  common  law,  as  being  against  public 
policy,  when  they  are  such  as  to  injuriously  affect,  or  subvert  the 
public  interests,  (i  Story,  Eq.  Juris.,  section  260^;  Chesterfield  v. 
Janssen,  2  Vesey  Sr.  125,  156.)  If  it  were  true  that  the  interest  of 
the  employed,  only,  would  be  affected  by  such  contracts  as  the 
present  one,  as  it  was  held  by  the  English  court,  in  Griffiths  v.  Earl  of 
Dudley  (supra},  it  would  be  difficult  to  defend,  upon  sound  reasoning, 
the  denial  of  the  right  to  enter  into  them;  but  that  is  not  quite  true. 
The  theory  of  their  invalidity  is  in  the  importance  to  the  state  that 
there  shall  be  no  relaxation  of  the  rule  of  law,  which  imposes  the  duty 
of  care  on  the  part  of  the  employer  toward  the  employed.  The  state 
is  interested  in  the  conservation  of  the  lives  and  of  the  healthful  vigor 
of  its  citizens,  and  if  employers  could  contract  away  their  responsi- 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  153 

bility  at  common  law,  it  would  tend  to  encourage  on  their  part  laxity 
of  conduct  in,  if  not  an  indifference  to,  the  maintenance  of  proper 
and  reasonable  safeguards  to  human  life  and  limb.  The  rule  of 
responsibility  at  common  law  is  as  just  as  it  is  strict  and  the  interest 
of  the  state  in  its  maintenance  must  be  assumed;  for  its  policy  has, 
in  recent  years,  been  evidenced  in  the  progressive  enactment  of 
many  laws,  which  regulate  the  employment  of  children  and  the  hours 
of  work,  and  impose  strict  conditions  with  reference  to  the  safety  and 
healthfulness  of  the  surroundings  of  the  employed,  in  the  factory  and 
in  the  shop.  The  employer  and  the  employed,  in  theory,  deal  upon 
equal  terms;  but,  practically,  that  is  not  always  the  case.  The 
artisan,  or  workman,  may  be  driven  by  need,  or  he  may  be  ignorant, 
or  of  improvident  character.  It  is,  therefore,  for  the  interest  of  the 
community  that  there  should  be  no  encouragement  for  any  relaxation 
on  the  employer's  part  in  his  duty  of  reasonable  care  for  the  safety  of 
his  employees.  That  freedom  of  contract  may  be  said  to  be  affected 
by  the  denial  of  the  right  to  make  such  agreement  is  met  by  the  answer 
that  the  restriction  is  but  a  salutary  one,  which  organized  society 
exacts  for  the  surer  protection  of  its  members.  While  it  is  true  that 
the  individual  may  be  the  one,  who,  directly,  is  interested  in  the 
making  of  such  a  contract,  indirectly  the  state,  being  concerned  for 
the  welfare  of  all  its  members,  is  interested  in  the  maintenance  of 
the  rule  of  liability  and  in  its  enforcement  by  the  courts. 

To  a  certain  extent,  the  internal  activities  of  organized  society 
are  subject  to  the  restraining  action  of  the  state.  This  is  evidenced 
by  the  many  laws  upon  the  statute  book,  in  recent  years,  which  have 
been  passed  for  the  purpose  of  prohibiting,  restricting,  or  regulating 
the  conduct  of  a  private  business,  either  because  regarded  as  hurtful 
to  the  health  or  welfare  of  the  community,  or  because  deemed  from 
its  nature,  or  magnitude,  affected  with  a  public  interest.  It  has  been 
observed  that  it  is  still  the  business  of  the  state,  in  modern  times,  to 
defend  individuals  against  one  another,  and,  though  the  proposition 
is  a  broad  one,  when  considered  with  reference  to  penal  legislation 
and  all  legislation  intended  for  the  promotion  of  health,  welfare,  and 
safety  of  the  community,  it  is  not  without  truth.  It  is  evident,  from 
the  course  of  legislation  framed  for  the  purpose  of  affording  greater 
protection  to  the  class  of  the  employed,  that  the  people  of  this  state 
have  compelled  the  employer  to  do  many  things  which  at  common 
law  he  was  not  under  obligation  to  do.  Such  legislation  may  be 
regarded  as  supplementing  the  common-law  rule  of  the  employer's 


154  LAW  AND  BUSINESS 

responsibility  and  is  illustrative  of  the  policy  of  the  state.  There- 
fore it  is,  when  an  agreement  is  sought  to  be  enforced  which  suspends 
the  operation  of  the  common-law  rule  of  liability  and  defeats  the 
spirit  of  existing  laws  of  the  state,  because  tending  to  destroy  the 
motive  of  the  employer  to  be  vigilant  in  the  performance  of  his  duty 
toward  his  employees,  that  it  is  the  duty  of  the  court  to  declare  it  to 
be  invalid  and  to  refuse  its  enforcement. 

I  think  that  the  judgment  below  was  correct  and  should  be 
affirmed,  with  costs. 

QUESTIONS 

1.  P  sues  D,  his  employer,  for  damages  arising  out  of  D's  negligence.     In 
defense,  D  relies  upon  a  contract  entered  into  after  the  injury  by  which 
P  agreed  to  release  him  from  liability  for  the  injury.    What  decision  ? 

2.  P  engages  D  to  work  in  his  mine  with  the  understanding  that  the  latter 
is  to  work  fourteen  hours  a  day.    D  is  compelled  by  his  economic  condi- 
tions to  accept  P's  terms  although  he  realizes  that  such  a  long  working 
day  will  be  highly  detrimental  to  his  health.    P  sues  D  for  a  breach  of 
the  contract.    D  contends  that  the  contract  is  illegal  and  void.    What 
decision  ? 

3.  D  engages  P  to  work  as  a  day  laborer  in  his  factory  at  a  compensation 
which  is  not  sufficient  to  provide  P  and  his  family  with  the  necessaries 
of  life.     P  sues  D  for  the  reasonable  value  of  his  services.     D  sets  up  the 
contract  of  employment  as  a  defense.    P  contends  that  the  wage  con- 
tract is  illegal  and  void  because  he  was  forced  to  enter  into  it  by  economic 
pressure.    What  decision  ? 

4.  D  discharges  P  from  his  employ.    P  sues  D  for  breach  of  a  contract  of 
employment.    D  alleges  and  proves  by  way  of  defense  that  notices  were 
published  in  his  plant  that  employees  were  not  privileged  to  join  unions; 
and  that  P,  in  violation  of  these  notices,  joined  a  union.    What  decision  ? 

5.  P,  after  experiencing  several  costly  strikes,  resolves  "to  run  his  mines 
non-union."    Thereafter  all  men  engaged  are  required  to  agree  that  they 
will  not  join  a  union.     D  and  others,  representing  a  union  of  miners, 
determine  to  unionize  P's  mines.    They  proceed  "  to  enroll  all  employees 
who  are  willing  to  agree  that  they  will  join  a  union  if  it  is  organized  at 
P's  mines."    P  asks  that  D  and  the  others  be  enjoined  from  continuing 
their  activities  in  and  about  his  mines.    What  decision  ? 

ADAIR  v.  UNITED  STATES 

208  United  States  Reports  161  (1908) 

The  facts,  which  involve  the  constitutionality  of  Section  10  of 
the  act  of  Congress,  concerning  carriers  engaged  in  interstate  com- 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  155 

merce  (known  as  the  Erdman  Act),  passed  June  i,  1898,  c.  370,  30 
Stat.  424,  are  stated  in  the  opinion. 

HARLAN,  C.  J.  The  tenth  section,  upon  which  the  present  prose- 
cution is  based,  is  in  these  words: 

That  any  employer  subject  to  the  provisions  of  this  act  and  any  officer, 
agent,  or  receiver  of  such  employer,  who  shall  require  any  employee,  or 
any  person  seeking  employment,  as  a  condition  of  such  employment,  to 
enter  into  an  agreement,  either  written  or  verbal,  not  to  become  or  remain 
a  member  of  any  labor  corporation,  association,  or  organization;  or  shall 
threaten  any  employee  with  loss  of  employment,  or  shall  unjustly  dis- 
criminate against  any  employee  because  of  his  membership  in  such  a  labor 
corporation,  association,  or  organization,  is  hereby  declared  to  be  guilty  of  a 
misdemeanor,  and,  upon  conviction  thereof  in  any  court  of  the  United 
States  of  competent  jurisdiction  in  the  district  in  which  such  offense  was 
committed,  shall  be  punished  for  each  offense  by  a  fine  of  not  less  than 
one  hundred  dollars  and  not  more  than  one  thousand  dollars. 

The  present  indictment  was  in  the  District  Court  of  the  United 
States  for  the  Eastern  District  of  Kentucky  against  the  defendant 
Adair. 

The  accused  Adair  demurred  to  the  indictment  as  insufficient  in 
law,  but  the  demurrer  was  overruled.  After  reviewing  the  authorities, 
in  an  elaborate  opinion,  the  court  held  the  tenth  section  of  the  act 
of  Congress  to  be  constitutional.  152  Fed.  Rep.  737.  The  defendant 
pleaded  not  guilty,  and  after  trial  a  verdict  was  returned  of  guilty 
on  the  first  count  and  a  judgment  rendered  that  he  pay  to  the  United 
States  a  fine  of  $100. 

It  thus  appears  that  the  criminal  offense  charged  in  the  count  of 
the  indictment  upon  which  the  defendant  was  convicted  was,  in 
substance  and  effect,  that  being  an  agent  of  a  railroad  company 
engaged  in  interstate  commerce  and  subject  to  the  provisions  of  the 
foregoing  act  of  June  i,  1898,  he  discharged  one  Coppage  from  its 
service  because  of  his  membership  in  a  labor  organization,  no  other 
ground  for  such  discharge  being  alleged. 

May  Congress  make  it  a  criminal  offense  against  the  United 
States — as  by  the  tenth  section  of  the  act  of  1898  it  does — for  an 
agent  or  officer  of  an  interstate  carrier,  having  full  authority  in  the 
premises  from  the  carrier,  to  discharge  an  employee  from  service 
simply  because  of  his  membership  in  a  labor  organization  ? 

The  first  inquiry  is  whether  the  part  of  the  tenth  section  of  the 
act  of  1898  upon  which  the  first  count  of  the  indictment  was  based 


156  LAW  AND  BUSINESS 

is  repugnant  to  the  Fifth  Amendment  of  the  Constitution  declaring 
that  no  person  shall  be  deprived  of  liberty  or  property  without  due 
process  of  law.  In  our  opinion  that  section,  in  the  particular  men- 
tioned, is  an  invasion  of  the  personal  liberty,  as  well  as  of  the  right 
of  property,  guaranteed  by  that  Amendment.  Such  liberty  and  right 
embraces  the  right  to  make  contracts  for  the  purchase  of  the  labor  of 
others  and  equally  the  right  to  make  contracts  for  the  sale  of  one's 
own  labor;  each  right,  however,  being  subject  to  the  fundamental 
condition  that  no  contract,  whatever  its  subject-matter,  can  be 
sustained  which  the  law,  upon  reasonable  grounds,  forbids  as  incon- 
sistent with  the  public  interest  or  as  hurtful  to  the  public  order  or  as 
detrimental  to  the  common  good.  This  court  has  said  that  "in 
every  well-ordered  society,  charged  with  the  duty  of  conserving  the 
safety  of  its  members,  the  rights  of  the  individual  in  respect  of  his 
liberty  may,  at  times,  under  the  pressure  of  great  dangers,  be  sub- 
jected to  such  restraint,  to  be  enforced  by  reasonable  regulations,  as 
the  safety  of  the  general  public  may  demand."  Jacobson  v.  Mas- 
sachusetts, 197  U.S.  n,  29,  and  authorities  there  cited.  Without 
stopping  to  consider  what  would  have  been  the  rights  of  the  railroad 
company  under  the  Fifth  Amendment,  had  it  been  indicted  under  the 
act  of  Congress,  it  is  sufficient  in  this  case  to  say  that  as  agent  of 
the  railroad  company  and  as  such  responsible  for  the  conduct  of  the 
business  of  one  of  its  departments,  it  was  the  defendant  Adair's 
right — and  that  right  inhered  in  his  personal  liberty,  and  was  also  a 
right  of  property — to  serve  his  employer  as  best  he  could,  so  long  as 
he  did  nothing  that  was  reasonably  forbidden  by  law  as  injurious  to 
the  public  interests.  It  was  the  right  of  the  defendant  to  prescribe 
the  terms  upon  which  the  services  of  Coppage  would  be  accepted,  and 
it  was  the  right  of  Coppage  to  become  or  not,  as  he  chose,  an  employee 
of  the  railroad  company  upon  the  terms  offered  to  him.  Mr.  Cooley, 
in  his  treatise  on  Torts,  page  278,  well  says: 

It  is  a  part  of  every  man's  civil  rights  that  he  be  left  at  liberty  to  refuse 
business  relations  with  any  person  whomsoever,  whether  the  refusal  rest 
upon  reason,  or  is  the  result  of  whim,  caprice,  prejudice  or  malice.  With 
his  reasons  neither  the  public  nor  third  persons  have  any  legal  concern. 
It  is  also  his  right  to  have  business  relations  with  any  one  with  whom  he 
can  make  contracts,  and  if  he  is  wrongfully  deprived  of  this  right  by  others, 
he  is  entitled  to  redress. 

In  Lochner  v.  New  York,  198  U.S.  45,  53,  56,  which  involved  the 
validity  of  a  state  enactment  prescribing  certain  maximum  hours  for 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  157 

labor  in  bakeries,  and  which  made  it  a  misdemeanor  for  an  employer 
to  require  or  permit  an  employee  in  such  an  establishment  to  work  in 
excess  of  a  given  number  of  hours  each  day,  the  court  said: 

The  general  right  to  make  a  contract  in  relation  to  his  business  is^aFt 
of  the  liberty  of  the  individual  protected  by  the  Fourteenth  Amendment  of 
the  Federal  Constitution.  Allgeyer  v.  Louisana,  165  U.S.  578.  Under 
that  provision  no  state  can  deprive  any  person  of  life,  liberty,  or  property, 
without  due  process  of  law.  The  right  to  purchase  or  to  sell  labor  is  part 
of  the  liberty  protected  by  this  amendment,  unless  there  are  circumstances 
which  exclude  the  right.  There  are,  however,  certain  powers,  existing  in 
the  sovereignty  of  each  state  in  the  Union,  somewhat  vaguely  termed  police 
powers,  the  exact  description  and  limitation  of  which  have  not  been 
attempted  by  the  courts.  Those  powers,  broadly  stated  and  without,  at 
present,  any  attempt  at  a  more  specific  limitation,  relate  to  the  safety, 
health,  morals,  and  general  welfare  of  the  public.  Both  property  and 
liberty  are  held  on  such  reasonable  conditions  as  may  be  imposed  by  the 
governing  power  of  the  state  in  the  exercise  of  those  powers,  and  with  such 
conditions  the  Fourteenth  Amendment  was  not  designed  to  interfere. 
Mugler  v.  Kansas,  123  U.S.  623;  In  re  Kemmler,  136  U.S.  436;  Crowley  v. 
Christensen,  137  U.S.  86;  In  re  Converse,  137  U.S.  624.  In  every  case  that 
comes  before  this  court,  therefore,  where  legislation  of  this  character  is 
concerned  and  where  the  protection  of  the  Federal  Constitution  is  sought, 
the  question  necessarily  arises:  Is  this  a  fair,  reasonable,  and  appropriate 
exercise  of  the  police  power  of  the  state,  or  is  it  an  unreasonable,  unnecessary 
and  arbitrary  interference  with  the  right  of  the  individual  to  his  personal 
liberty  or  to  enter  into  those  contracts  in  relation  to  labor  which  may  seem 
to  be  appropriate  or  necessary  for  the  support  of  himself  and  his  family  ? 
Of  course  the  liberty  of  contract  relating  to  labor  includes  both  parties  to 
it.  The  one  has  as  much  right  to  purchase,  as  the  other  to  sell,  labor. 

Although  there  was  a  difference  of  opinion  in  that  case  among  the 
members  of  the  court  as  to  certain  propositions,  there  was  no  dis- 
agreement as  to  the  general  proposition  that  there  is  a  liberty  of  con- 
tract which  cannot  be  unreasonably  interfered  with  by  legislation. 
The  minority  were  of  opinion  that  the  business  referred  to  in  the 
New  York  statute  was  such  as  to  require  regulation,  and  that  as  the 
statute  was  not  shown  plainly  and  palpably  to  have  imposed  an 
unreasonable  restraint  upon  freedom  of  contract,  it  should  be 
regarded  by  the  courts  as  a  valid  exercise  of  the  state's  power  to 
care  for  the  health  and  safety  of  its  people. 

While,  as  already  suggested,  the  rights  of  liberty  and  property 
guaranteed  by  the  Constitution  against  deprivation  without  due  pro- 


158  LAW  AND  BUSINESS 

cess  of  law  are  subject  to  such  reasonable  restraints  as  the  common 
good  or  the  general  welfare  may  require,  it  is  not  within  the  functions 
of  government — at  least  in  the  absence  of  contract  between  the 
parties — to  compel  any  person  in  the  course  of  his  business  and 
against  his  will  to  accept  or  retain  the  personal  services  of  another, 
or  to  compel  any  person,  against  his  will,  to  perform  personal  services 
for  another.  The  right  of  a  person  to  sell  his  labor  upon  such 
terms  as  he  deems  proper  is,  in  its  essence,  the  same  as  the  right 
of  the  purchaser  of  labor  to  prescribe  the  conditions  upon  which 
he  will  accept  such  labor  from  the  person  offering  to  sell  it.  So 
the  right  of  the  employee  to  quit  the  service  of  the  employer,  for 
whatever  reason,  is  the  same  as  the  right  of  the  employer,  for  what- 
ever reason,  to  dispense  with  the  services  of  such  employee.  It  was 
the  legal  right  of  the  defendant  Adair — however  unwise  such  a  course 
might  have  been — to  discharge  Coppage  because  of  his  being  a 
member  of  a  labor  organization,  as  it  was  the  legal  right  of  Coppage, 
if  he  saw  fit  to  do  so — however  unwise  such  a  course  on  his  part  might 
have  been — to  quit  the  service  in  which  he  was  engaged,  because  the 
defendant  employed  some  persons  who  were  not  members  of  a  labor 
organization.  In  all  such  particulars  the  employer  and  the  employee 
have  equality  of  right,  and  any  legislation  that  disturbs  that  equality 
is  an  arbitrary  interference  with  the  liberty  of  contract  which  no  gov- 
ernment can  legally  justify  in  a  free  land.  These  views  find  support 
in  adjudged  cases,  some  of  which  are  cited  in  the  margin.  Of  course, 
if  the  parties  by  contract  fix  the  period  of  service,  and  prescribe  the 
conditions  upon  which  the  contract  may  be  terminated,  such  contract 
would  control  the  rights  of  the  parties  as  between  themselves,  and 
for  any  violation  of  those  provisions  the  party  wronged  would  have 
his  appropriate  civil  action.  And  it  may  be — but  upon  that  point 
we  express  no  opinion — that  in  the  case  of  a  labor  contract  between 
an  employer  engaged  in  interstate  commerce  and  his  employee, 
Congress  could  make  it  a  crime  for  either  party  without  sufficient 
or  just  excuse  or  notice  to  disregard  the  terms  of  such  contract  or  to 
refuse  to  perform  it.  In  the  absence,  however,  of  a  valid  contract 
between  the  parties  controlling  their  conduct  toward  each  other  and 
fixing  a  period  of  service,  it  cannot  be,  we  repeat,  that  an  employer 
is  under  any  legal  obligation,  against  his  will,  to  retain  an  employee 
in  his  personal  service  any  more  than  an  employee  can  be  compelled, 
against  his  will,  to  remain  in  the  personal  service  of  another.  So  far 
as  this  record  disclosed  the  facts  the  defendant,  who  seemed  to  have 
authority  in  the  premises,  did  not  agree  to  keep  Coppage  in  service 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  159 

for  any  particular  time,  nor  did  Coppage  agree  to  remain  in  such 
service  a  moment  longer  than  he  chose.  The  latter  was  at  liberty 
to  quit  the  service  without  assigning  any  reason  for  his  leaving.  And 
the  defendant  was  at  liberty,  in  his  discretion,  to  discharge  Coppage 
from  service  without  giving  any  reason  for  so  going. 

As  the  relations  and  the  conduct  of  the  parties  toward  each  other 
was  not  controlled  by  any  contract  other  than  a  general  agreement 
on  one  side  to  accept  the  services  of  the  employee  and  a  general 
agreement  on  the  other  side  to  render  services  to  the  employer — no 
term  being  fixed  for  the  continuance  of  the  employment — Congress 
could  not,  consistently  with  the  Fifth  Amendment,  make  it  a  crime 
against  the  United  States  to  discharge  the  employee  because  of  his 
being  a  member  of  a  labor  organization. 

The  judgment  must  be  reversed,  with  directions  to  set  aside  the 
verdict  and  judgment  of  conviction,  sustain  the  demurrer  to  the 
indictment,  and  dismiss  the  case. 

QUESTIONS 

1.  What  were  the  provisions  of  the  law  in  controversy  in  the  principal 
case?    What  objections  were  urged  against  the  validity  of  the  law? 
How  were  these  objections  disposed  of  ? 

2.  Kansas  passes  a  law  making  it  a  punishable  offense  for  an  employer  to 
require  an  employee  to  surrender  his  privilege  of  joining  a  union  as  a 
condition  of  employment.    D  is  indicted  under  the  statute.    He  contends 
that  the  law  is  unconstitutional.     What  decision  ? 

3.  A  state  passes  a  law  making  it  a  punishable  offense  for  an  employer  to 
require  an  employee,  as  a  condition  of  employment,  to  contract  to  release 
the  employer  from  liability  for  negligence.    D  is  being  tried  for  a  viola- 
tion of  this  law.     D  contends  that  the  law  is  unconstitutional  because 
it  is  in  conflict  with  the  Fourteenth  Amendment  to  the  Federal  Constitu- 
tion.   What  decision  ? 

HOLDEN  v.  HARDY 
169  United  States  Reports  366  (1897) 

BROWN,  J.  This  involves  the  constitutionality  of  an  act  of  the 
legislature  of  Utah,  of  March  30,  1896,  c.  72,  entitled  "An  act  regulat- 
ing the  hours  of  employment  in  underground  mines  and  in  smelters 
and  ore  reduction  works."  Session  Laws  of  Utah,  1896,  p.  219. 
The  following  are  the  material  provisions: 

SECTION  i.  The  period  of  employment  of  workingmen  in  all  under- 
ground mines  or  workings  shall  be  eight  hours  per  day,  except  in  cases  of 
emergency  where  life  or  property  is  in  imminent  danger. 


160  LAW  AND  BUSINESS 

SEC.  2.  The  period  of  employment  of  workingmen  in  smelters  and 
all  other  institutions  for  the  reduction  of  refining  of  ores  or  metals  shall 
be  eight  hours  per  day,  except  in  cases  of  emergency  where  life  or  prop- 
erty is  in  imminent  danger. 

SEC.  3.  Any  person,  body  corporate,  agent,  manager,  or  employer, 
who  shall  violate  any  of  the  provisions  of  sections  one  and  two  of  this  act, 
shall  be  guilty  of  a  misdemeanor. 

The  Supreme  Court  of  Utah  was  of  opinion  that  if  authority  in 
the  legislature  were  needed  for  the  enactment  of  the  statute  in  ques- 
tion, it  was  found  in  that  part  of  Article  16  of  the  constitution  of  the 
state,  which  declared  that  "the  legislature  shall  pass  laws  to  provide 
for  the  health  and  safety  of  employees  in  factories,  smelters,  and 
mines." 

The  validity  of  the  statute  in  question  is,  however,  challenged 
upon  the  ground  of  an  alleged  violation  of  the  Fourteenth  Amend- 
ment to  the  Constitution  of  the  United  States,  in  that  it  abridges 
the  privileges  or  immunities  of  citizens  of  the  United  States,  deprives 
both  the  employer  and  the  laborer  of  his  property  without  due  process 
of  law,  and  denies  to  them  the  equal  protection  of  the  laws.  As  the 
three  questions  of  abridging  their  immunities,  depriving  them  of  their 
property,  and  denying  them  the  protection  of  the  laws,  are  so  con- 
nected that  the  authorities  upon  each  are,  to  a  greater  or  less  extent, 
pertinent  to  the  others,  they  may  properly  be  considered  together. 

While  the  business  of  mining  coal  and  manufacturing  iron  began 
in  Pennsylvania  as  early  as  1716;  and  in  Virginia,  North  Carolina, 
and  Massachusetts  even  earlier  than  this,  both  mining  and  manu- 
facturing were  carried  on  in  such  a  limited  way  and  by  such  primitive 
methods  that  no  special  laws  were  considered  necessary,  prior  to  the 
adoption  of  the  Constitution,  for  the  protection  of  the  operatives;  but, 
in  the  vast  proportions  which  these  industries  have  since  assumed,  it 
has  been  found  that  they  can  no  longer  be  carried  on  with  due  regard 
to  the  safety  and  health  of  those  engaged  in  them  without  special 
protection  against  the  dangers  necessarily  incident  to  these  employ- 
ments. In  consequence  of  this,  laws  have  been  enacted  in  most  of 
the  states  designed  to  meet  these  exigencies  and  to  secure  the  safety 
of  persons  peculiarly  exposed  to  these  dangers.  Within  this  general 
category  are  ordinances  providing  for  fire  escapes  for  hotels,  theaters, 
factories,  and  other  large  buildings,  a  municipal  inspection  of  boilers 
and  appliances  designed  to  secure  passengers  upon  railways  and 
steamboats  against  the  dangers  necessarily  incident  to  these  methods 
of  transportation.  In  states  where  manufacturing  is  carried  on  to  a 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  161 

large  extent,  provision  is  made  for  the  protection  of  dangerous 
machinery  against  accidental  contact,  for  the  cleanliness  and  ventila- 
tion of  working-rooms,  for  the  guarding  of  well  holes,  stairways,  ele- 
vator shafts,  and  for  the  employment  of  sanitary  appliances.  In 
others,  where  mining  is  the  principal  industry,  special  provision  is 
made  for  the  shoring  up  of  dangerous  walls,  for  ventilation  shafts, 
bore  holes,  escapement  shafts,  means  of  signaling  the  surface,  for 
the  supply  of  fresh  air  and  the  elimination,  as  far  as  possible,  of 
dangerous  gases,  for  safe  means  of  hoisting  and  lowering  cages,  for 
a  limitation  upon  the  number  of  persons  permitted  to  enter  a  cage, 
that  cages  shall  be  covered,  and  that  there  shall  be  fences  and  gates 
around  the  top  of  shafts,  besides  other  similar  precautions. 

These  statutes  have  been  repeatedly  enforced  by  the  courts  of 
the  several  states,  their  validity  assumed,  and,  so  far  as  we  are 
informed,  they  have  been  uniformly  held  to  be  constitutional. 

But  if  it  be  within  the  power  of  a  legislature  to  adopt  such  means 
for  the  protection  of  the  lives  of  its  citizens,  it  is  difficult  to  see  why 
precautions  may  not  also  be  adopted  for  the  protection  of  their 
health  and  morals.  It  is  as  much  for  the  interest  of  the  state  that 
the  public  health  should  be  preserved  as  that  life  should  be  made 
secure.  With  this  end  in  view  quarantine  laws  have  been  enacted 
in  most  if  not  all  of  the  states;  insane  asylums,  public  hospitals,  and 
institutions  for  the  care  and  education  of  the  blind  established, 
and  special  measures  taken  for  the  exclusion  of  infected  cattle,  rags,  and 
decayed  fruit.  In  other  states  laws  have  been  enacted  limiting  the 
hours  during  which  women  and  children  shall  be  employed  in  factories; 
and  while  their  constitutionality,  at  least  as  applied  to  women,  has 
been  doubted  in  some  of  the  states,  they  have  been  generally  upheld. 
Thus,  in  the  case  of  Commonwealth  v.  Hamilton  Manufacturing  Co., 
1 20  Mass.  383,  it  was  held  that  a  statute  prohibiting  the  employment 
of  all  persons  under  the  age  of  eighteen,  and  of  all  women  laboring  in 
any  manufacturing  establishment  more  than  sixty  hours  per  week, 
violates  no  contract  of  the  Commonwealth  implied  in  the  granting  of 
a  charter  to  a  manufacturing  company  nor  any  right  reserved  under 
the  Constitution  to  any  individual  citizen,  and  may  be  maintained  as 
a  health  or  police  regulation. 

Upon  the  principles  above  stated,  we  think  the  act  in  question 
may  be  sustained  as  a  valid  exercise  of  the  police  power  of  the  state. 
The  enactment  does  not  profess  to  limit  the  hours  of  all  workmen, 
but  merely  those  who  are  employed  in  underground  mines,  or  in  the 
smelting,  reduction,  or  refining  of  ores  and  metals.  These  employ- 


1 62  LAW  AND  BUSINESS 

ments,  when  too  long  pursued,  the  legislature  has  judged  to  be  detri- 
mental to  the  health  of  the  employees,  and,  so  long  as  there  are 
reasonable  grounds  for  believing  that  this  is  so,  its  decision  upon  this 
subject  cannot  be  reviewed  by  the  federal  courts. 

While  the  general  experience  of  mankind  may  justify  us  in  believ- 
ing that  men  may  engage  in  ordinary  employments  more  than  eight 
hours  per  day  without  injury  to  their  health,  it  does  not  follow  that 
labor  for  the  same  length  of  time  is  innoxious  when  carried  on  beneath 
the  surface  of  the  earth,  where  the  operative  is  deprived  of  fresh  air 
and  sunlight,  and  is  frequently  subjected  to  foul  atmosphere  and  a 
very  high  temperature,  or  to  the  influence  of  noxious  gases,  generated 
by  the  processes  of  refining  or  smelting. 

The  legislature  has  also  recognized  the  fact,  which  the  experience 
of  legislators  in  many  states  has  corroborated,  that  the  proprietors  of 
these  establishments  and  their  operatives  do  not  stand  upon  an 
equality,  and  that  their  interests  are,  to  a  certain  extent,  conflicting. 
The  former  naturally  desire  to  obtain  as  much  labor  as  possible  from 
their  employees,  while  the  latter  are  often  induced  by  the  fear  of 
discharge  to  conform  to  regulations  which  their  judgment,  fairly 
exercised,  would  pronounce  to  be  detrimental  to  their  health  or 
strength.  In  other  words,  the  proprietors  lay  down  the  rules  and 
the  laborers  are  practically  constrained  to  obey  them.  In  such  cases, 
self-interest  is  often  an  unsafe  guide,  and  the  legislature  may  properly 
interpose  its  authority. 

It  may  not  be  improper  to  suggest  in  this  connection  that  although 
the  prosecution  in  this  case  was  against  the  employer  of  labor,  who 
apparently  under  the  statute  is  the  only  one  liable,  his  defense  is  not 
so  much  that  his  right  to  contract  has  been  infringed  upon,  but  that 
the  act  works  a  peculiar  hardship  to  his  employees,  whose  right  to 
labor  as  long  as  they  please  is  alleged  to  be  thereby  violated.  The 
argument  would  certainly  come  with  better  grace  and  greater  cogency 
from  the  latter  class.  But  the  fact  that  both  parties  are  of  full  age 
and  competent  to  contract  does  not  necessarily  deprive  the  state  of 
the  power  to  interfere  where  the  parties  do  not  stand  upon  an  equality, 
or  where  the  public  health  demands  that  one  party  to  the  contract 
shall  be  protected  against  himself.  "  The  state  still  retains  an  interest 
in  his  welfare,  however  reckless  he  may  be.  The  whole  is  no  greater 
than  the  sum  of  all  the  parts,  and  when  the  individual  health,  safety, 
and  welfare  are  sacrificed  or  neglected,  the  state  must  suffer." 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  163 

We  have  no  disposition  to  criticize  the  many  authorities  which 
hold  that  state  statutes  restricting  the  hours  of  labor  are  unconstitu- 
tional. Indeed,  we  are  not  called  upon  to  express  an  opinion  upon 
this  subject.  It  is  sufficient  to  say  of  them,  that  they  have  no  applica- 
tion to  cases  where  the  legislature  had  adjudged  that  a  limitation  is 
necessary  for  the  preservation  of  the  health  of  employees,  and  there 
are  reasonable  grounds  for  believing  that  such  determination  is 
supported  by  the  facts.  The  question  in  each  case  is  whether  the 
legislature  has  adopted  the  statute  in  exercise  of  a  reasonable  discre- 
tion, or  whether  its  action  be  a  mere  excuse  for  an  unjust  discrimina- 
tion, or  the  oppression,  or  spoliation  of  a  particular  class. 

We  are  of  opinion  that  the  act  in  question  was  a  valid  exercise  of 
the  police  power  of  the  state,  and  the  judgments  of  the  Supreme 
Court  of  Utah  are,  therefore, 

Affirmed. 

QUESTIONS 

1.  D  is  being  tried  for  violation  of  a  statute  which  forbids  the  employment 
of  children  under  the  age  of  fourteen  years  in  mills  and  factories.     D 
contends  that  the  law  is  unconstitutional  because  it  interferes  with  his 
privilege   of   entering   freely   into   contracts   of   employment.      What 
decision  ? 

2.  In  the  foregoing  case,  D  contends  that  the  law  is  unconstitutional  for 
the  further  reason  that  it  denies  him  the  equal  protection  of  the  law, 
guaranteed  by  the  Federal  Constitution,  in  that  the  law  is  made  appli- 
cable to  mills  and  factories  only  and  not  to  other  occupations.    What 
decision  ? 

3.  D  is  being  tried  for  violation  of  a  statute  which  provides  that  "no  female 
shall  be  employed  in  any  factory  or  workshop  more  than  eight  hours 
in  one  day,  or  forty-eight  hours  in  any  one  week."     D  contends  that 
the  law  is  unconstitutional.    What  decision  ? 

4.  D  is  being  tried  for  violation  of  a  statute  which  provides  that  no  man 
shall  be  employed  in  underground  mines  for  more  than  eight  hours  a 
day.    D  contends  that  the  law  is  unconstitutional,  (a)  because  it  inter- 
feres with  his  freedom  of  contract  and  (b)  because  it  denies  him  the  equal 
protection  of  the  law.     What  decision  ? 

5.  A  state  passes  a  law  compelling  all  employers  to  pay  their  employees 
at  least  twice  a  month.    What  is  the  purpose  of  this  law  ?    Discuss  its 
constitutionality. 

6.  A  state  passes  a  law  compelling  all  employers  to  pay  their  employees  in 
cash.    What  is  the  purpose  of  this  law  ?    Discuss  its  constitutionality. 


164  LAW  AND  BUSINESS 

2.     Liability  of  Employer  for  Injuries  to  Employees 

a)  Under  the  Common  Law 

i.      RISKS  ASSUMED  BY  THE  EMPLOYEE 

GIBSON  v.  ERIE  RAILWAY  COMPANY 
63  New  York  Reports  449  (1875) 

ALLEN,  J.  When  the  deceased  entered  the  employment  of  the 
defendant  he  assumed  the  usual  risks  and  perils  of  the  service,  and 
also  the  risks  and  perils  incident  to  the  use  of  the  machinery  and 
property  of  the  defendant  as  it  then  was,  so  far  as  such  risks  were 
apparent.  Accepting  service  with  a  knowledge  of  the  character  and 
position  of  the  structure  from  which  the  employees  might  be  liable 
to  receive  injury,  he  could  not  call  upon  the  defendant  to  make 
alterations  to  secure  greater  safety,  or  in  case  of  injury  from  risks 
which  were  apparent,  he  could  not  call  upon  his  employer  for 
indemnity.  LORD  CHIEF  JUSTICE  COCKBURN,  in  Clarke  v.  Holmes 
(7H.&N.  937),  says: 

No  doubt,  when  a  servant  enters  on  an  employment,  from  its  nature 
necessarily  hazardous,  he  accepts  the  service  subject  to  the  risks  incidental 
to  it;  or  if  he  thinks  proper  to  accept  an  employment  on  machinery,  defect- 
ive from  its  construction  or  from  the  want  of  proper  repair,  and  with 
knowledge  of  the  facts  enters  on  the  service,  the  master  cannot  be  held 
liable  for  injury  to  the  servant  within  the  scope  of  the  danger  which  both 
the  contracting  parties  contemplated  as  incidental  to  the  employment. 

It  is  said  by  ELLSWORTH,  J.,  in  Hoyden  v.  Smithmlle  Manufacturing 
Co.  (29  Conn.  548),  that 

Every  manufacturer  has  the  right  to  choose  the  machinery  to  be'  used 
in  his  business  in  the  manner  most  agreeable  to  himself,  provided  he  does 
not  thereby  violate  the  law  of  the  land.  He  may  select  his  appliances  and 
run  his  mill  with  old  or  new  machinery,  just  as  he  may  ride  in  an  old  or 
new  carriage,  or  navigate  an  old  or  a  new  vessel.  The  employee,  having 
knowledge  of  the  circumstances  and  entering  service  for  the  stipulated 
reward,  cannot  complain  of  the  peculiar  tastes  and  habits  of  his  employer, 
nor  sue  him  for  damages  sustained  in  and  resulting  from  that  peculiar 
service. 

QUESTIONS 

i.  Assuming  that  in  general  a  person  is  not  liable  for  non-negligent  injuries 
which  he  causes,  is  there  any  reason  why  an  exception  to  this  rule  should 
be  made  in  favor  of  employees  or  servants  injured  in  the  course  of  their 
employment  ? 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  165 

2.  In  the  running  of  X  industry,  a  certain  number  of  accidents  are  inevitable. 
Is  there  any  reason  why  these  risks  should  be  carried  entirely  by  the 
employees  of  that  industry  ?     Is  there  any  reason  for  placing  them  all 
on  employers  in  that  industry  ? 

3.  Even  if  judgments  are  given  against  employers,  does  it  follow  that  the 
losses  are  being  carried  wholly  by  employers  ? 

4.  One  writer,  in  justification  of  the  rule  laid  down  by  the  principal  case, 
says:   "Under  the  law  of  life  as  well  as  under  the  law  of  the  land,  a  loss 
must  rest  upon  him  on  whom  it  falls  unless  there  is  some  good  reason 
and  opportunity  to  shift  it  to  someone  else.     Under  the  law  of  justice, 
and,   notwithstanding  some  notable  exceptions,    under  the  common 
law,  a  person  cannot  be  held  liable  for  an  injury  for  which  he  is  in  no 
sense  at  fault.    With  reference  to  the  risks  here  concerned,  they  inhere 
in  the  business  and  are  not  attributable  to  the  negligence  of  the  master." 
Is  this  a  sufficient  justification  for  the  rule  laid  down  by  the  principal 
case? 

FARWELL  v.  BOSTON  &  WORCESTER  RAILROAD 
CORPORATION 

4  Metcalf's  Massachusetts  Reports  49  (1842) 

The  case  was  submitted  to  the  court  on  the  following  facts  agreed 
by  the  parties : 

The  plaintiff  was  employed  by  the  defendants,  in  1835,  as  an  engineer, 
and  went  at  first  with  the  merchandise  cars,  and  afterward  with  the  passen- 
ger cars,  and  so  continued  till  October  30,  1837,  at  the  wages  of  two  dollars 
per  day;  that  being  the  usual  wages  paid  to  enginemen,  which  are  higher 
than  the  wages  paid  to  a  machinist,  in  which  capacity  the  plaintiff  formerly 
was  employed. 

On  the  3oth  of  October,  1837,  the  plaintiff,  then  being  in  the  employ- 
ment of  the  defendants,  as  such  engineman,  and  running  the  passenger  train, 
ran  his  engine  off  a  switch  on  the  road,  which  had  been  left  in  a  wrong  condi- 
tion (as  alleged  by  the  plaintiff,  and,  for  the  purposes  of  this  trial,  admitted 
by  the  defendants)  by  one  Whitcomb,  another  servant  of  the  defendants, 
who  had  been  long  in  their  employment  as  a  switchman  or  tender,  and  had 
the  care  of  switches  on  the  road,  and  was  a  careful  and  trustworthy  servant 
in  his  general  character,  and  as  such  servant  was  well  known  to  the  plaintiff. 
By  which  running  off,  the  plaintiff  sustained  the  injury  complained  of  in 
his  declaration. 

The  said  Farwell  (the  plaintiff)  and  Whitcomb  were  both  appointed 
by  the  superintendent  of  the  road,  who  was  in  the  habit  of  passing  over 
the  same  very  frequently  in  the  cars,  and  often  rode  on  the  engine. 

If  the  court  shall  be  of  opinion  that,  as  matter  of  law,  the  defendants  are 
not  liable  to  the  plaintiff,  he  being  a  servant  of  the  corporation,  and  in  their 


166  LAW  AND  BUSINESS 

employment,  for  the  injury  he  may  have  received  from  the  negligence  of 
said  Whitcomb,  another  servant  of  the  corporation,  and  in  their  employ- 
ment, then  the  plaintiff  shall  become  nonsuit;  but  if  the  court  shall  be  of 
opinion  as  a  matter  of  law,  that  the  defendants  may  be  liable  in  this  case, 
then  the  case  shall  be  submitted  to  a  jury  upon  the  facts  which  may  be 
proved  in  the  case;  the  defendants  alleging  negligence  on  the  part  of  the 
plaintiff. 

SHAW,  C.  J.  This  is  an  action  of  new  impression  in  our  courts, 
and  involves  a  principle  of  great  importance.  It  presents  a  case 
where  two  persons  are  in  the  service  and  employment  of  one  company, 
whose  business  it  is  to  construct  and  maintain  a  railroad  and  to  employ 
their  train  of  cars  to  carry  persons  and  merchandise  for  hire.  They 
are  appointed  and  employed  by  the  same  company  to  perform  separate 
duties  and  services,  all  tending  to  the  accomplishment  of  one  and  the 
same  purpose — that  of  the  safe  and  rapid  transmission  of  the  trains; 
and  they  are*  paid  for  their  respective  services  according  to  the  nature 
of  their  respective  duties,  and  the  labor  and  skill  required  for  their 
proper  performance.  The  question  is,  whether,  for  damages  sustained 
by  one  of  the  persons  so  employed,  by  means  of  the  carelessness  and 
negligence  of  another,  the  party  injured  has  a  remedy  against  the 
common  employer.  It  is  an  argument  against  such  an  action, 
though  certainly  not  a  decisive  one,  that  no  such  action  has  before 
been  maintained. 

It  is  laid  down  by  Blackstone,  that  if  a  servant,  by  his  negligence, 
does  any  damage  to  a  stranger,  the  master  shall  be  answerable  for 
his  neglect.  But  the  damage  must  be  done  while  he  is  actually 
employed  in  the  master's  service,  otherwise,  the  ^ervant  shall  answer 
for  his  own  misbehavior,  i  Bl.  Com.  431;  McManus  v.  Crickett, 
i  East,  106.  This  rule  is  obviously  founded  on  the  great  principle 
of  social  duty,  that  every  man,  in  the  management  of  his  own  affairs, 
whether  by  himself  or  by  his  agents  or  servants,  shall  so  conduct 
them  as  not  to  injure  another;  and  if  he  does  not,  and  another  thereby 
sustains  damage,  he  shall  answer  for  it.  If  done  by  a  servant,  in  the 
course  of  his  employment,  and  acting  within  the  scope  of  his  authority, 
it  is  considered,  in  contemplation  of  law,  so  far  the  act  of  the  master 
that  the  latter  shall  be  answerable  civilater.  But  this  presupposes 
that  the  parties  stand  to  each  other  in  the  relation  of  strangers, 
between  whom  there  is  no  privity,  and  the  action,  in  such  case,  is 
an  action  sounding  in  tort.  The  form  is  trespass  on  the  case,  for  the 
consequential  damage.  The  maxim  respondeat  superior  is  adopted  in 
that  case,  from  general  considerations  of  policy  and  security. 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  167 

But  this  does  not  apply  to  the  case  of  a  servant  bringing  his  action 
against  his  own  employer  to  recover  damages  for  an  injury  arising 
in  the  course  of  that  employment,  where  all  such  risks  and  perils  as 
the  employer  and  the  servant  respectively  intend  to  assume  and  bear 
may  be  regulated  by  the  express  or  implied  contract  between  them,  and 
which,  in  contemplation  of  law,  must  be  presumed  to  be  thus  regulated. 

The  same  view  seems  to  have  been  taken  by  the  learned  counsel 
for  the  plaintiff  in  the  argument;  and  it  was  conceded  that  the  claim 
could  not  be  placed  on  the  principle  indicated  by  the  maxim  respondeat 
superior,  which  binds  the  master  to  indemnify  a  stranger  for  the 
damage  caused  by  the  careless,  negligent,  or  unskilful  act  of  his 
servant  in  the  conduct  of  his  affairs.  The  claim,  therefore,  is  placed, 
and  must  be  maintained,  if  maintained  at  all,  on  the  ground  of  con- 
tract. As  there  is  no  express  contract  between  the  parties  applicable 
to  this  point,  it  is  placed  on  the  footing  of  an  implied  contract  of 
indemnity,  arising  out  of  the  relation  of  master  and  servant.  It 
would  be  an  implied  promise,  arising  from  the  duty  of  the  master 
to  be  responsible  to  each  person  employed  by  him,  in  the  conduct  of 
every  branch  of  business,  where  two  or  more  persons  are  employed,  to 
pay  for  all  damages  occasioned  by  the  negligence  of  every  other  person 
employed  in  the  same  service.  If  such  a  duty  were  established  by 
law — like  that  of  a  common  carrier,  to  stand  to  all  losses  of  goods 
not  caused  by  the  act  of  God  or  of  a  public  enemy — or  that  of  an 
innkeeper,  to  be  responsible,  in  like  manner,  for  the  baggage  of  his 
guests,  it  would  be  a  rule  of  frequent  and  familiar  occurrence,  and 
its  existence  and  application,  with  all  its  qualifications  and  restric- 
tions, would  be  settled  by  judicial  precedents.  But  we  are  of  opinion 
that  no  such  rule  has  been  established,  and  the.  authorities,  as  far  as 
they  go,  are  opposed  to  the  principle.  Priestley  v.  Fowler,  3  Mees. 
&  Welsby  i;  Murray  v.  South  Carolina  Railroad  Co.,  i  McMullan 
(S.C.)  385- 

The  general  rule  resulting  from  considerations  as  well  of  justice 
as  of  policy  is,  that  he  who  engages  in  the  employment  of  another 
for  the  performance  of  specified  duties  and  services,  for  compensa- 
tion, takes  upon  himself  the  natural  and  ordinary  risks  and  perils 
incident  to  the  performance  of  such  services,  and  in  legal  presumption, 
the  compensation  is  adjusted  accordingly.  And  we  are  not  aware  of 
any  principle  which  should  except  the  perils  arising  from  the  careless- 
ness and  negligence  of  those  who  are  in  the  same  employment.  These 
are  perils  which  the  servant  is  likely  to  know,  and  against  which  he 
can  as  effectually  guard  as  the  master.  They  are  perils  incident  to 


i68  LAW  AND  BUSINESS 

the  service,  and  which  can  be  as  distinctly  foreseen  and  provided  for 
in  the  rate  of  compensation  as  any  others.  To  say  that  the  master 
shall  be  responsible  because  the  damage  is  caused  by  his  agents,  is 
assuming  the  very  point  which  remains  to  be  proved.  They  are  his 
agents  to  some  extent,  and  for  some  purposes;  but  whether  he  is 
responsible,  in  a  particular  case,  for  their  negligence,  is  not  decided 
by  the  single  fact  that  they  are,  for  some  purposes,  his  agents. 

If  we  look  from  considerations  of  justice  to  those  of  policy,  they 
will  strongly  lead  to  the  same  conclusion.     In  considering  the  rights 
and  obligations  arising  out  of  particular  relations,  it  is  competent 
for  courts  of  justice  to  regard  considerations  of  policy  and  general 
convenience,  and   to  draw  from  them  such  rules  as  will,  in  their 
practical  application,  best  promote  the  safety  and  security  of  all 
parties  concerned.    This  is,  in  truth,  the  basis  on  which  implied 
promises  are  raised,  being  duties  legally  inferred  from  a  considera- 
tion of  what  is  best  adapted  to  promote  the  benefit  of  all  persons 
concerned,  under  given  circumstances.     To  take  the  well-known  and 
familiar  cases  already  cited:    a  common  carrier,  without  regard  to 
actual  fault  or  neglect  in  himself  or  his  servants,  is  made  liable  for 
all  losses  of  goods  confided  to  him  for  carriage  except  those  caused 
by  the  act  of  God  or  of  a  public  enemy,  because  he  can  best  guard 
them  against  all  minor  dangers,  and  because,  in  case  of  actual  loss, 
it  would  be  extremely  difficult  for  the  owner  to  adduce  proof  of  em- 
bezzlement, or  other  actual  fault  or  neglect  on  the  part  of  the  carrier, 
although  it  may  have  been   the  real  cause  of  the  loss.     The  risk 
is  therefore  thrown  upon  the  carrier  and  he  receives,  in  the  form 
of  payment  for  the  carriage,  a  premium  for  the  risk  which  he  thus 
assumes.     So  of  an  innkeeper:  he  can  best  secure  the  attendance 
of  honest  and  faithful  servants,  and  guard  his  house  against  thieves  • 
Whereas,  if  he  were  responsible  only  upon  proof  of  actual  negligence, 
he  might  connive  at  the  presence  of  dishonest  inmates  and  retainers, 
and  even  participate  in  the  embezzlement  of  the  property  of  the  guests 
during  the  hours  of  their  necessary  sleep,  and  yet  it  would  be  difficult 
and  often  impossible  to  prove  these  facts. 

The  liability  of  passenger-carriers  is  founded  on  similar  considera- 
tions. They  are  held  to  the  strictest  responsibility  for  care,  vigilance, 
and  skill  on  the  part  of  themselves  and  all  persons  employed  by  them, 
and  they  are  paid  accordingly.  The  rule  is  founded  on  the  expediency 
of  throwing  the  risk  upon  those  who  can  best  guard  against  it.  Story 
on  Bailments,  section  590  ff. 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  169 

We  are  of  opinion  that  these  considerations  apply  strongly  to  the 
case  in  question.  Where  several  persons  are  employed  in  the  conduct 
of  one  common  enterprise  or  undertaking,  and  the  safety  of  each 
depends  much  on  the  care  and  skill  with  which  each  other  shall  perform 
his  appropriate  duty,  each  is  an  observer  of  the  conduct  of  the  others, 
can  give  notice  of  any  misconduct,  incapacity,  or  neglect  of  duty,  and 
leave  the  service,  if  the  common  employer  will  not  take  such  pre- 
cautions and  employ  such  agents,  as  the  safety  of  the  whole  party 
may  require.  By  these  means,  the  safety  of  each  will  be  much  more 
effectually  secured  than  could  be  done  by  a  resort  to  the  common 
employer  for  indemnity  in  case  of  loss  by  the  negligence  of  each 
other.  Regarding  it  in  this  light,  it  is  the  ordinary  case  of  one  sus- 
taining an  injury  in  the  course  of  his  own  employment,  in  which  he 
must  bear  the  loss  himself,  or  seek  his  remedy,  if  he  have  any,  against 
the  actual  wrongdoer. 

In  applying  these  principles  to  the  present  case,  it  appears  that 
the  plaintiff  was  employed  by  the  defendants  as  an  engineer,  at  the 
rate  of  wages  usually  paid  in  that  employment,  being  a  higher  rate 
than  the  plaintiff  had  before  received  as  machinist.  It  was  a  volun- 
tary undertaking  on  his  part,  with  a  full  knowledge  of  the  risks 
incident  to  the  employment;  and  the  loss  was  sustained  by  means  of 
an  ordinary  casualty,  caused  by  the  negligence  of  another  servant 
of  the  company.  Under  these  circumstances,  the  loss  must  be  deemed 
to  be  the  result  of  a  pure  accident,  like  those  to  which  all  men,  in  all 
employments,  and  at  all  times,  are  more  or  less  exposed;  and  like 
similar  losses  from  accidental  causes,  it  must  rest  where  it  first  fell, 
unless  the  plaintiff  has  a  remedy  against  the  person  actually  in  default; 
on  which  we  give  no  opinion. 

It  was  strongly  pressed  in  the  argument,  that  although  this  might 
be  so,  where  two  or  more  servants  are  employed  in  the  same  depart- 
ment of  duty,  where  each  can  exert  some  influence  over  the  conduct 
of  the  other,  and  thus  to  some  extent  provide  for  his  own  security, 
yet  that  it  could  not  apply  where  two  or  more  are  employed  in  different 
departments  of  duty,  at  a  distance  from  each  other,  and  where  one 
can  in  no  degree  control  or  influence  the  conduct  of  another.  But  we 
think  this  is  founded  upon  a  supposed  distinction  on  which  it  would 
be  extremely  difficult  to  establish  a  practical  rule.  When  the  object 
to  be  accomplished  is  one  and  the  same,  when  the  employers  are  the 
same,  and  the  several  persons  employed  derive  their  authority  and 
their  compensation  from  the  same  source,  it  would  be  extremely 


1 70  LAW  AND  BUSINESS 

difficult  to  distinguish  what  constitutes  one  department  and  what 
a  distinct  department  of  duty.  It  would  vary  with  the  circumstances 
of  every  case.  If  it  were  made  to  depend  upon  the  nearness  or 
distance  of  the  persons  from  each  other,  the  question  would  immedi- 
ately arise,  how  near  or  how  distant  must  they  be  to  be  in  the  same 
or  different  departments.  In  a  blacksmith's  shop  persons  working 
in  the  same  building,  at  different  fires,  may  be  quite  independent  of 
each  other,  though  only  a  few  feet  distant.  In  a  ropewalk,  several 
may  be  at  work  on  the  same  piece  of  cordage,  at  the  same  time,  at 
many  hundred  feet  distant  from  each  other,  and  beyond  the  reach 
of  sight  and  voice,  and  yet  acting  together. 

Besides,  it  appears  to  us,  that  the  argument  rests  upon  an  assumed 
principle  of  responsibility  which  does  not  exist.  The  master,  in  the 
case  supposed,  is  not  exempt  from  liability  because  the  servant  has 
better  means  of  providing  for  his  safety,  when  he  is  employed  in 
immediate  connection  with  those  from  whose  negligence  he  might 
suffer,  but  because  the  implied  contract  of  the  master  does  not  extend 
to  indemnify  the  servant  against  the  negligence  of  anyone  but  himself, 
and  he  is  not  liable  in  tort,  as  for  the  negligence  of  his  servant,  because 
the  person  suffering  does  not  stand  toward  him  in  the  relation  of  a 
stranger,  but  is  one  whose  rights  are  regulated  by  contract  expressed 
or  implied.  The  exemption  of  the  master,  therefore,  from  liability 
for  the  negligence  of  a  fellow-servant  does  not  depend  exclusively 
upon  the  consideration  that  the  servant  has  better  means  to  provide 
for  his  own  safety,  but  upon  other  grounds.  Hence  the  separation  of 
the  employment  into  different  departments  cannot  create  that  liability 
when  it  does  not  arise  from  expressed  or  implied  contract,  or  from  a 
responsibility  created  by  law  to  third  persons,  and  strangers,  for  the 
negligence  of  a  servant. 

A  case  may  be  put  for  the  purpose  of  illustrating  this  distinction. 
Suppose  the  road  had  been  owned  by  one  set  of  proprietors  whose 
duty  it  was  to  keep  it  in  repair  and  have  it  at  all  times  ready  and  in 
fit  condition  for  the  running  of  engines  and  cars,  taking  a  toll,  and 
that  the  engines  and  cars  were  owned  by  another  set  of  proprietors, 
paying  toll  to  the  proprietors  of  the  road,  and  receiving  compensa- 
tion from  passengers  for  their  carriage;  and  suppose  the  engineer  to 
suffer  a  loss  from  the  negligence  of  the  switch-tender.  We  are  inclined 
to  the  opinion  that  the  engineer  might  have  a  remedy  against  the 
railroad  corporation;  and  if  so,  it  must  be  on  the  ground  that  as 
between  the  engineer  employed  by  the  proprietors  of  the  engine  and 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  171 

cars  and  the  switch-tender  employed  by  the  corporation,  the  engineer 
would  be  a  stranger,  between  whom  and  the  corporation  there  could 
be  no  privity  of  contract;  and  not  because  the  engineer  would  have 
no  means  of  controlling  the  conduct  of  the  switch-tender.  JThe 
responsibility  which  one  is  under  for  the  negligence  of  his  servant, 
in  the  conduct  of  his  business,  toward  third  persons,  is  founded  on 
another  and  distinct  principle  from  that  of  implied  contract,  and 
stands  on  its  own  reasons  of  policy.  The  same  reasons  of  policy,  we 
think,  limit  this  responsibility  to  the  case  of  strangers,  for  whose 
security  alone  it  is  established.  Like  considerations  of  policy  and 
general  expediency  forbid  the  extension  of  the  principle,  so  far  as  to 
warrant  a  servant  in  maintaining  an  action  against  his  employer  for 
an  indemnity  which  we  think  was  not  contemplated  in  the  nature  and 
terms  of  the  employment,  and  which,  if  established,  would  not  conduce 
to  the  general  good. 

In  coming  to  the  conclusion  that  the  plaintiff,  in  the  present  case, 
is  not  entitled  to  recover,  considering  it  as  in  some  measure  a  nice 
question,  we  would  add  a  caution  against  any  hasty  conclusion  as  to 
the  application  of  this  rule  to  a  case  not  fully  within  the  same  principle. 
It  may  be  varied  and  modified  by  circumstances  not  appearing  in  the 
present  case,  in  which  it  appears  that  no  wilful,  wrong,  or  actual 
negligence  was  imputed  to  the  corporation,  and  where  suitable 
means  were  furnished  and  suitable  persons  employed  to  accomplish 
the  object  in  view.  We  are  far  from  intending  to  say  that  there  are 
no  implied  warran  ies  and  undertakings  arising  out  of  the  relation  of 
master  and  servant.  Whether,  for  instance,  the  employer  would  be 
responsible  to  an  engineer  for  a  loss  arising  from  a  defective  or  ill- 
constructed  steam  engine;  whether  this  would  depend  upon  an 
implied  warranty  of  its  goodness  and  sufficiency,  or  upon  the  fact 
of  wilful  misconduct,  or  gross  negligence  on  the  part  of  the  employer, 
if  a  natural  person,  or  of  the  superintendent  or  immediate  representa- 
tive and  managing  agent,  in  case  of  an  incorporated  company — are 
questions  on  which  we  give  no  opinion.  In  the  present  case  the  claim 
of  the  plaintiff  is  not  put  on  the  ground  that  the  defendants  did  not 
furnish  a  sufficient  engine,  a  proper  railroad  track,  a  well-constructed 
switch,  and  a  person  of  suitable  skill  and  experience  to  attend  it;  the 
gravamen  of  the  complaint  is,  that  that  person  was  chargeable  with 
negligence  in  not  changing  the  switch,  in  the  particular  instance,  by 
means  of  which  the  accident  occurred,  by  which  the  plaintiff  sustained 
a  severe  loss.  It  ought,  perhaps,  to  be  stated,  in  justice  to  the  person 


172  LAW  AND  BUSINESS 

to  whom  this  negligence  is  imputed,  that  the  fact  is  strenously  denied 
by  the  defendants,  and  has  not  been  tried  by  the  jury.  By  consent 
of  the  parties,  this  fact  was  assumed  without  trial,  in  order  to  take 
the  opinion  of  the  whole  court  upon  the  question  of  law,  whether,  if 
such  was  the  fact,  the  defendants,  under  the  circumstances  were 
liable.  Upon  this  question,  supposing  the  accident  to  have  occurred, 
and  the  loss  to  have  been  caused,  by  the  negligence  of  the  person 
employed  to  attend  to  and  change  the  switch,  in  his  not  doing  so  in 
the  particular  case,  the  court  is  of  opinion  that  it  is  a  loss  for  which 
the  defendants  are  not  liable,  and  that  the  action  cannot  be  main- 
tained. 

Plaintiff  nonsuit. 
QUESTIONS 

1.  X,  a  servant  of  D,  while  acting  in  the  course  of  his  employment,  negli- 
gently injures  P.     P  brings  an  action  against  D  for  damages.    What 
decision  ? 

2.  The  court  says  that  under  the  doctrine  of  this  case  the  safety  of  each 
servant  "will  be  much  more  effectually  secured  than  could  be  done  by 
a  resort  to  the  common  employer  for  indemnity  in  case  of  loss  by  the 
negligence  of  the  other."    Is  this  statement  convincing? 

3.  The  court  says  that  the  servant  "takes  upon  himself  the  natural  and 
ordinary  risks  and  perils  incident  to  the  performance  of  such  services 
and  in  legal  presumption  the  compensation  is  adjusted  accordingly." 
To  what  extent  is  this  true  ? 

4.  The  court  says  that  when  a  servant  enters  the  master's  employ  he 
impliedly  contracts  that  he  will  assume  the  risk  of  injury  due  to  the 
negligence  of  his  fellow-servants.    Do  you  suppose   that   a  servant 
actually  intends  to  assume  such  risks  or  is  this  statement  simply  a  fiction 
of  the  law  ? 

5.  When  was  the  fellow-servant  rule  first  announced?    What  was  the 
size  of  industry  at  the  time  ?    What  were  the  characteristics  of  industry 
at  the  time  ? 

6.  Even  if  a  servant  should  recover  a  judgment  from  his  master  because 
of  the  negligent  conduct  of  a  fellow-servant,  does  it  necessarily  follow 
that  the  loss  will  be  ultimately  borne  by  the  master  ?    Who  will  ulti- 
mately bear  such  loss  ?    Who  should  bear  it  ? 

MANN  v.  O'SULLIVAN 
126  California  Reports  61  (1899) 

GAROUTTE,  J.  This  is  an  action  to  recover  damages  for  personal 
injuries.  The  single  question  involved  is,  Does  the  complaint  state 
a  cause  of  action  ? 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  173 

Defendant  was  the  owner  of  a  certain  building  in  which  she 
operated  and  maintained  an  elevator.  As  appears  by  the  complaint 
"  plain  tiff  was  employed  by  said  defendant  to  work  for  her  in  the 
capacity  of  a  carpenter  and  to  perform  the  work  of  inclosing-the 
elevator  shaft  in  said  premises  within  a  glass  frame."  While  working 
at  this  employment  "said  defendant,  through  her  servant,  agent,  and 
employee,  one  Emmet  Carney,  carelessly,  negligently  and  without  any 
warning  or  notice  to  plaintiff,  and  against  his  positive  instructions 
not  to  operate  the  elevator  herein  mentioned  at  any  time  without 
notice  to  him,  suddenly  operated  said  elevator  from  the  ground  floor, 
where  said  elevator  was  standing,  so  that  said  elevator  suddenly 
struck  with  great  force  the  screening  on  which  plaintiff  was  working 
as  aforesaid;  and  that,  by  reason  of  the  gross  negligence  and  careless- 
ness of  said  defendant  in  operating  said  elevator  as  aforesaid,  said 
plaintiff  sustained  the  injuries  above  mentioned." 

The  important  matter  presented  by  this  appeal  arises  upon  the 
solution  of  the  question  as  to  whether  or  not  the  plaintiff  and  Carney, 
the  man  operating  the  elevator,  were  fellow-servants.  In  other 
words,  these  two  men  being  employed  by  defendant,  were  they 
employed  "in  the  same  general  business"?  (Civil  Code,  section 
1970.)  It  is  impossible  to  declare  a  rule  of  law  by  which  all  cases 
presenting  this  interesting  question  may  be  weighed  and  tested.  In 
that  excellent  work,  the  American  and  English  Encyclopedia  of  Law, 
VII,  864,  it  is  said:  "In  the  note  will  be  found  every  authority  it  is 
believed,  determining  who  are  and  who  are  not  fellow-servants, 
alphabetically  arranged  according  to  the  various  occupations  or 
employments."  Yet,  after  a  careful  perusal  of  that  note,  we  still 
find  the  same  mist  surrounding  the  question,  and  the  legal  atmosphere 
in  no  degree  clarified.  The  authorities  are  widely  divergent,  and  the 
text-writers  appear  to  be  unable  to  agree  upon  a  satisfactory  rule  by 
which  it  may  be  determined  who  are  fellow-servants,  or  what  servants 
are  engaged  in  a  common  employment,  or,  as  the  statute  of  this 
state  has  it,  what  servants  are  employed  "in  the  same  general  busi- 
ness." Shearman  and  Redfield,  in  their  work  upon  Negligence  declare 
the  rule  as  favorable  to  the  servant  as  it  can  be  found  in  any  standard 
work,  and  that  rule  is  declared  in  section  236:  "Under  the  generally 
prevailing  rule,  fellow-servants  are  engaged  in  a  common  employ- 
ment when  each  of  them  is  occupied  in  service  of  such  a  kind  that  all 
the  others  in  the  exercise  of  ordinary  sagacity  ought  to  be  able  to 
foresee,  when  accepting  their  employment,  that  his  negligence  would 


174  LAW  AND  BUSINESS 

probably  expose  them  to  injury."  Testing  this  case  by  the  foregoing 
rule,  the  conclusion  is  irresistible  that  plaintiff,  who  was  employed  to 
repair  the  elevator  shaft,  and  Carney,  the  man  who  was  employed  to 
operate  the  elevator,  were  servants  of  defendant,  engaged  in  a  common 
employment  or  as  our  statute  has  it,  engaged  "in  the  same  general 
business."  It  was  plain  to  the  plaintiff  when  he  began  work  in 
repairing  the  elevator  shaft  that  the  negligence  of  Carney  would 
expose  him  to  great  danger.  He  recognized  the  fact  that  danger  was 
present  with  him,  for  he  instructed  Carney  not  to  raise  the  elevator 
without  a  notification  to  him,  in  order  that  he  might  first  remove  to 
a  place  of  safety.  The  conclusion  arrived  at  in  many  cases  rests 
upon  the  principle  that  the  danger  from  the  negligence  of  another 
employee  being  fairly  apparent,  it  should  be  held  that  all  other 
employees  assume  the  risk  incident  to  that  danger;  and  this  principle 
forms  the  foundation  of  the  rule  which  we  have  quoted  from  Shear- 
man and  Redfield. 

We  will  notice  a  few  cases  where  the  facts  and  principle  invoked 
appear  to  be  similar  to  those  here  presented.  In  Besel  v.  N.Y.C. 
Railroad  Co.,  70  N.Y.  177,  it  is  held  that  a  car  repairer  working  upon 
a  car  was  in  common  employment  with  the  men  in  charge  of  a  train 
not  connected  with  the  car  upon  which  the  repairer  was  doing  the 
work.  To  the  same  effect  is  Corcoran  v.  Deleware,  etc.,  Railroad  Co., 
126  N.Y.  673,  and  Campbell  v.  Pennsylvania  Railroad  Co.  (Penn., 
Jan.  4,  1886),  24  Am.  &  Eng.  R.R.,  Cas.  427.  In  Hasty  v.  Sears,  157 
Mass.  123,  34  Am.  St.  Rep.  267,  a  case  identical  in  its  facts  with  the 
one  before  us,  the  court  said:  "The  plaintiff  and  the  elevator  boy  were 
both  servants  of  the  defendant  at  the  time  of  the  plaintiff's  injury, 
and,  as  their  employment  was  a  common  employment,  the  negligence 
of  the  boy  in  running  the  car  down  upon  the  plaintiff  was  an  obvious 
risk  which  the  plaintiff  assumed,  and  for  which  the  defendant  is  not 
answerable  to  him.  The  plaintiff  and  the  boy  were  both  working  to 
secure  the  successful  operation  of  the  elevator,  the  plaintiff  in  repairing 
it  and  the  boy  in  operating  the  car,  and  they  were  forwarding  a 
common  enterprise  for  the  benefit  of  the  defendant,  and  were  in 
common  employment."  In  Pagundes  v.  C.P.  Railroad  Co.,  79  Cal. 
97,  it  is  held  that  a  laborer  working  upon  the  railroad  track  is  a 
fellow-servant  with  a  conductor  and  a  track-walker.  In  Livingstone 
v.  Kodak  Packing  Co.,  103  Cal.  263,  it  is  held  that  the  mate  of  a  vessel 
and  a  waiter  at  the  table  are  engaged  "in  the  same  general  business" 
in  the  sense  of  those  words  as  used  in  section  1970  of  the  Civil  Code. 
The  court  declared  that  the  general  business  of  the  defendant  was 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  175 

the  carrying  of  freight  and  passengers  upon  its  steamer;  that  in  the 
conduct  of  that  business  a  waiter  was  as  necessary  an  employee  as  a 
mate,  and  both  were  essentially  necessary  for  the  proper  conduct  of 
the  business.  In  the  case  at  bar,  it  may  be  said  that  the  business  of 
defendant  was  operating  and  maintaining  an  elevator.  A  boy  or 
man  to  manipulate  it  was  a  necessity,  and  likewise  an  engineer  to 
handle  the  engine  and  furnish  the  power,  and  likewise  a  man  to  repair 
the  machine  itself  when  out  of  order.  These  men  in  their  respective 
lines  of  vocation  were  necessary  to  the  operation  of  the  machine,  and 
were  assisting  in  the  same  general  business  of  operating  and  main- 
taining the  machine.  The  man  to  repair  the  elevator  when  it  was 
out  of  order  was  as  necessary  as  the  waiter  to  the  ship,  or  the  repairer 
to  the  car,  or  the  laborer  to  the  railroad  track.  The  allegation  of  the 
plaintiff  that  he  was  employed  by  the  defendant  in  the  capacity  of  a 
carpenter  to  do  certain  work  for  her,  and  that  at  the  time  he  received 
the  injury  complained  of  he  was  doing  the  work  for  which  he  was 
employed  "under  the  direction  of  the  defendant"  shows  that  he  was 
not  an  independent  contractor,  and  precludes  him  from  invoking  the 
principles  declared  in  Bennett  v.  Trubody,  66  Cal.  510,  56  Am.  Rep. 
117.  The  defendant  would  have  been  liable  to  a  stranger  for  any 
injury  sustained  by  reason  of  his  negligence  upon  the  ground  that 
he  was  the  servant  of  the  defendant. 

It  is  also  claimed  that  from  the  face  of  the  complaint  it  appears 
that  the  accident  occurred  from  the  negligence  of  the  defendant  her- 
self. The  pleading  does  not  bear  this  construction.  After  stating 
that  the  accident  occurred  by  reason  of  Carney  operating  the  elevator, 
the  pleading  then  declares  that  "  defendant  did  thereby  negligently 
and  carelessly  precipitate  with  great  force, "  et  cetera.  The  complaint 
further  declares  that  "by  reason  of  the  gross  negligence  and  careless- 
ness of  said  defendant  in  operating  said  elevator  as  aforesaid,  said 
plaintiff  sustained  the  injuries,"  et  cetera.  It  is  entirely  plain  from 
these  allegations  that  the  elevator  was  being  operated  by  Carney  and 
that  by  reason  of  his  negligence  in  so  operating  it  the  accident 
occurred.  By  any  reasonable  construction  of  the  pleading  it  contains 
nothing  indicating  negligence  upon  the  part  of  anyone  except  Carney. 

It  is  next  insisted  that  if  plaintiff  and  Carney  were  fellow-servants 
and  engaged  in  the  same  general  business,  then  that  fact  should  be 
pleaded  in  the  answer.  It  is  sufficient  to  say  that  if  the  facts  alleged 
in  the  complaint  show  that  the  servants  are  fellow-servants  and 
engaged  in  the  same  general  business,  then  that  fact  may  be  taken 
advantage  of  by  demurrer. 


176  LAW  AND  BUSINESS 

It  is  also  declared  that  it  was  the  duty  of  the  master  to  warn 
plaintiff  when  the  elevator  was  about  to  start.  If  there  had  been 
an  express  agreement  to  that  effect  made  by  the  master  and  the  servant, 
the  plaintiff,  when  he  was  hired  to  do  the  work,  there  might  be  some 
force  in  this  contention.  (Bradley  v.  N.Y.C.  Railroad  Co.,  62  N.Y. 
99.)  But  plaintiff  went  to  work  without  any  such  agreement,  and 
acted  alone  upon  the  confidence  he  had  in  a  compliance  with  the 
request  he  made  to  the  elevator  man,  Carney,  to  give  him  notice  of 
the  starting  of  the  cage. 

For  the  foregoing  reasons  the  judgment  (for  defendant)  is 
affirmed. 

QUESTIONS 

1.  What  test  is  laid  down  in  the  principal  case  for  determining  whether 
given  employees  are  fellow-servants  ? 

2.  "Fellow-servants  are  engaged  in  common  employment  when  each  of 
them  is  occupied  in  such  employment  that  all  the  others  in  the  exercise 
of  ordinary  sagacity  ought  to  be  able  to  foresee,  when  accepting  their 
employment,  that  the  negligence  of  one  of  them  would  probably  expose 
the  others  to  injury."     Comment  on  this  test. 

3.  Some  courts  hold  that  given  employees  are  fellow-servants  "when  they 
are  co-operating  at  the  time  of  the  injury  in  the  particular  business  in 
hand,  or  whose  usual  duties  are  such  as  to  bring  them  into  habitual 
association  or  into  such  relations  that  they  can  exercise  an  influence 
upon  each  other  promotive  of  proper  caution."     Comment  on  this  test. 

4.  Some  cases  hold  that  where  the  master's  business  is  an  extensive  one, 
the  fellow-servant  rule  should  apply  only  to  those  servants  who  are 
working  together  in  the  same  general  department.     Comment  on  this 
test. 

5.  Through  the  negligence  of  an  engineer  of  the  D  Company,  P,  a  day 
laborer,  working  on  the  right  of  way,  is  injured.     P  sues  the  company 
for  damages.    What  decision  ? 

6.  P,  a  fireman  on  a  train,  sues  the  D  Company  for  an  injury  caused  by 
the  negligence  of  X,  the  engineer.     The  company  relies  on  the  fellow- 
servant  rule  as  a  defense.    What  decision  ? 

7.  P,  -a  flagman  on  one  of  D's  trains,  is  injured  by  the  negligence  of  the 
engineer  on  another  train  of  the  company.     P  sues  the  company  for 
damages.    What  decision  ? 

8.  The  X  Company  runs  its  trains  over  the  tracks  of  the  D  Company. 
P,  an  engineer,  in  the  employ  of  the  X  Company,  is  injured  through 
the  negligence  of  Y,  a  switchman  in  the  employ  of  the  D  Company. 
P  sues  the  D  Company  for  damages.    What  decision  ? 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  177 

LAMSON  v.  AMERICAN  AXE  AND  TOOL  COMPANY 

177  Massachusetts  Reports  144  (1900) 

Tort,  under  the  employer's  liability  act,  St.  1887,  c.  270,  for 
personal  injuries  occasioned  to  the  plaintiff  while  in  the  defendant's 
employ.  Trial  in  the  Superior  Court,  before  LAWTON,  J.,  who  directed 
the  jury  to  return  a  verdict  for  the  defendant;  and  the  plaintiff 
alleged  exceptions,  which  appear  in  the  opinion. 

HOLMES,  C.  J.  This  is  an  action  for  personal  injuries  caused  by 
the  fall  of  a  hatchet  from  a  rack  hi  front  of  which  it  was  the  plaintiff's 
business  to  work  at  painting  hatchets,  and  upon  which  the  hatchets 
were  to  be  placed  to  dry  when  painted.  The  plaintiff  had  been  in 
the  defendant's  employment  for  many  years.  About  a  year  before 
the  accident  new  racks  had  been  substituted  for  those  previously  in 
use,  and  it  may  be  assumed  that  they  were  less  safe  and  were  not 
proper,  but  were  dangerous  on  account  of  the  liability  of  the  hatchets 
to  fall  from  the  pegs  upon  the  plaintiff  when  the  racks  were  jarred  by 
the  motion  of  machinery  near  by.  The  plaintiff  complained  to  the 
superintendent  that  the  hatchets  were  more  likely  to  drop  off  than 
when  the  old  racks  were  in  use,  and  that  now  they  might  fall  upon 
him,  which  they  could  not  have  done  from  the  old  racks.  He  was 
answered  in  substance  that  he  would  have  to  use  the  racks  or  leave. 
The  accident  which  he  feared  happened,  and  he  brought  this  suit. 

The  plaintiff,  on  his  own  evidence,  appreciated  the  danger  more 
than  anyone  else.  He  perfectly  understood  what  was  likely  to 
happen.  That  likelihood  did  not  depend  upon  the  doing  of  some 
negligent  act  by  people  in  another  branch  of  employment,  but  solely 
on  the  permanent  conditions  of  the  racks  and  their  surroundings  and 
the  plaintiff's  continuing  to  work  where  he  did.  He  complained,  and 
was  notified  that  he  could  go  if  he  would  not  face  the  chance.  He 
stayed  and  took  the  risk.  Carrigan  v.  Washburn  6*  Moen  Manu- 
facturing Co.,  170  Mass.  79.  See  Lewis  v.  New  York  &  New  Eng- 
land Railroad,  153  Mass.  73 ;  Prentiss  v.  Kent  Furniture  Manufacturing 
Co.,  63  Mich.  478.  He  did  so  none  the  less  that  the  fear  of  losing  his 
place  was  one  of  his  motives.  Leary  v.  Boston  &  Albany  Railroad, 
139  Mass.  580;  Haley  v.  Case,  142  Mass.  316;  Westcott  v.  New 
York  &  New  England  Railroad,  153  Mass.  460. 

Exceptions  overruled. 


178  LAW  AND  BUSINESS 

QUESTIONS 

1.  Was  not  the  defendant  in  this  case  guilty  of  negligence  ?    If  so,  why  was 
the  plaintiff  not  permitted  to  recover  damages  ? 

2.  What  would  have  been  the  decision  in  the  principal  case  if  the  plaintiff 
had  remained  in  the  defendant's  employ  not  knowing  or  appreciating 
the  danger  in  question  ? 

3.  P  is  injured  in  the  course  of  his  employment  by  the  negligence  of  his 
employer,  D.     P  sues  D  for  damages.    D  pleads  that  P,  in  consideration 
of  his  employment,  agreed  to  release  him  from  all  liability  for  negligence. 
P  contends  that  the  contract  is  illegal  and  void.     What  decision  ? 

4.  What  would  have  been  the  decision  in  the  principal  case  if  the  defendant 
had  promised  to  remedy  the  situation  but  had  not  when,  two  weeks 
later,  the  plaintiff  was  injured  ? 

5.  P  knows  that  X,  a  fellow-servant,  is  incompetent  but  remains  in  D's 
employ  without  making  any  complaint  to  D  about  X.    Later  P  is 
injured  through  the  negligence  of  X.    What  decision  in  an  action  by 
P  against  D  ? 

6.  P  appreciates  the  unsafeness  of  his  place  of  work  but  continues  in  D's 
employ  without  complaint.     P  is  later  injured  because  of  the  unsafe 
condition  of  D's  premises.    What  decision  in  an  action  by  P  against  D  ? 

SOLT  v.  WILLIAMSPORT  RADIATOR  COMPANY 
231  Pennsylvania  State  Reports  585  (1911) 

MOSCHZISKER,  J.  On  May  23,  1909,  the  plaintiff,  a  man  then 
forty-nine  years  of  age,  while  working  at  the  manufacturing  estab- 
lishment of  the  defendant  company,  suffered  a  fracture  of  the  left 
arm  which  necessitated  its  amputation.  He  had  been  employed  by 
the  defendant  for  about  two  years  before  the  accident,  and  had  been 
working  for  nearly  two  years  at  the  particular  kind  of  employment 
in  which  he  suffered  his  injury.  In  the  manufacture  of  radiators  the 
defendant  used  what  are  termed  "rattlers,"  horizontal  iron  drums 
in  which  are  placed  the  rough  castings  for  the  purpose  of  cleaning 
and  smoothing.  It  was  part  of  the  plaintiff's  duty  to  keep  these 
rattlers  running.  They  are  revolved  by  means  of  belts  extending 
to  and  connected  with  pulleys  on  a  line-shaft  attached  to  the  ceiling 
some  ten  or  twelve  feet  overhead.  When  the  plaintiff  came  to  work 
on  the  morning  of  the  accident  he  found  that  one  of  these  belts  was 
off  the  line-shaf t  pulley.  The  defendant  had  no  belt-shifters  or  other 
mechanical  contrivances  for  the  purpose  of  throwing  the  belts  on  or 
off,  and  it  was  the  habit  of  the  men  employed  about  the  establish- 
ment to  replace  them  by  climbing  a  ladder  to  the  line-shaft  and  adjust- 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  179 

ing  the  belts  by  the  aid  of  a  piece  of  stick  of  wood,  which  was  kept  for 
that  purpose;  and  this  the  plaintiff  attempted  to  do.  He  testified:  "  I 
crawled  up  on  [the  ladder]  there  to  put  that  belt  on.  I  was  holding 
the  belt  in  one  hand  and  the  stick  in  the  other,  and  I  shoved  k  in 
as  carefully  as  I  could,  but  the  stick  caught  and  my  arm  went  right 
under,  but  after  that,  I  do  not  know  what  happened."  He  said  that 
it  was  all  over  so  quickly  that  he  could  not  tell  exactly  how  the  accident 
occurred,  but  that  he  thought  his  arm  must  have  got  caught  between 
the  belt  and  the  pulley.  He  further  stated  that  the  shaft  was  running 
"full  blast";  and  uncontro verted  testimony  of  the  defendant  shows 
this  to  have  been  between  270  and  280  revolutions  per  minute.  The 
plaintiff  said  that  he  had  attempted  to  put  the  belt  on  "just  as  I  had 
seen  others  put  them  on."  He  also  said  "I  think  that  [slowing 
down]  would  be  the  right  way  to  put  on  belts,  as  near  as  I  can  tell 
you,"  and  "to  stop  the  engine — would  be  the  safest  way,  I  think." 
In  answer  to  the  question,  "Then  you  think,  if  the  line-shaft  was 
slowed  down,  you  could  put  on  the  belt  without  danger?"  he  said, 
"It  stands  to  reason  that  a  fellow  could  put  it  on  easier  than  running 
full  speed."  And  he  admitted  that  he  had  known  the  line-shaft  to 
have  been  "slowed  down — once  in  a  while,  but  not  very  often,"  for 
the  purpose  of  putting  on  belts.  Certain  testimony  of  the  defense  relied 
upon  by  the  plaintiff  shows  an  admission  on  the  part  of  several  of 
the  witnesses  that  they  did  not  always  have  the  engine  closed  down 
when  readjusting  the  small  belts,  and  that  they  used  their  own  "  judg- 
ment" in  the  matter,  and  were  "willing  to  take  a  chance  occasion- 
ally"; but  these  same  witnesses  all  said  that  it  was  a  dangerous  thing 
to  do,  one  of  them  stating  that  to  put  on  a  belt  when  the  machinery 
was  in  full  operation  was  at  "the  risk  of  your  life." 

While  the  trial  judge  affirmed  a  request  for  charge  to  the  effect 
that  "the  plaintiff  used  the  most  dangerous  method  for  adjusting  a 
belt  to  a  fast  revolving  line-shaft  pulley, "  yet  he  refused  to  give  bind- 
ing instructions  for  the  defendant,  and  after  the  verdict  was  rendered 
for  the  plaintiff  the  court  below  refused  to  enter  judgment  non 
obstante  veredicto.  There  are  several  assignments  of  error,  but  it  is 
only  necessary  for  the  purpose  of  determining  this  case  to  pass  upon 
the  seventh  and  eighth  which  go  to  the  point  just  indicated. 

The  act  of  May  2,  1905,  P.L.  352,  section  n,  provides:  "The 
owner  or  person  in  charge  of  an  establishment  where  machinery  is 
used  shall  provide  belt-shifters  or  other  mechanical  contrivances  for 
the  purpose  of  throwing  on  or  off  belts  or  pulleys."  The  non- 


i8o  LAW  AND  BUSINESS 

compliance  of  the  defendant  with  the  provisions  of  this  act  consti- 
tuted negligence,  and  if  the  plaintiff  was  not  plainly  guilty  of  contrib- 
utory negligence,  the  case  was  for  the  jury;  but  if  his  own  negligence 
did  contribute  to  the  accident,  then  binding  instructions  should  have 
been  given  in  favor  of  the  defendant.  Jones  v.  American  Caramel  Co., 
22$  Pa.  St.  644. 

To  do  an1  obviously  dangerous  thing  which  one  is  required  to  do 
in  order  to  perform  the  duties  of  one's  employment  is  an  assumption 
of  a  risk,  but  not  necessarily  contributory  negligence.  If  the  statutory 
law  requires  guards  against  such  a  risk,  and  the  employer  has  failed 
to  comply  with  such  a  requirement,  the  defense  of  assumption  of  risk 
is  not  available  to  him,  and  in  the  absence  of  contributory  negligence, 
the  plaintiff  can  recover.  But  to  do  an  act  necessary  to  the  perfor- 
mance of  the  duties  of  one's  employment  in  a  way  which  is  obviously 
dangerous  when  one  can  perform  the  act  in  another  way  known  to 
him,  which  is  reasonably  safe,  is  contributory  negligence  which  will 
bar  a  recovery,  even  though  the  employer  may  have  been  negligent  in 
not  complying  with  the  requirements  of  the  statute. 

The  testimony  in  this  case  justifies  but  one  conclusion,  and  that 
is  that  the  plaintiff  undertook  to  do  an  obviously  dangerous  act  when  he 
attempted  to  adjust  the  belt  while  the  shaft  was  running  at  full  speed. 
"Where  two  ways  of  discharging  the  service  are  apparent  to  an 
employee,  one  dangerous  and  the  other  safe  or  reasonably  so,  the 
employee  must  select  the  latter,  whether  or  not  it  is  the  less  convenient 
to  him;  and  if  he  chooses  the  former,  and  the  danger  is  such  that  a 
reasonably  prudent  man  would  not  incur  the  risk  under  the  same 
circumstances,  he  is  guilty  of  such  negligence  as  will  bar  recovery, 
although  the  master  may  also  have  been  negligent."  American  and 
English  Encyclopedia  of  Law,  XX  (2d  ed.),  146.  The  habitual  care- 
lessness of  his  fellow-workmen  does  not  justify  the  plaintiff,  and  it 
will  not  do  to  say  that  he  lacked  proper  instructions  or  appreciation 
of  the  danger,  for  he  was  a  mature  man  who  had  been  working  around 
machinery  for  a  considerable  length  of  time  before  the  accident,  and 
in  addition  to  this  he  acknowledges  in  his  testimony  that  there  was 
another  and  safer  way  of  doing  this  work  than  the  one  he  pursued. 
This  unfortunate  man  has  suffered  a  great  loss,  but,  since  his  own 
carelessness  contributed  directly  to  the  happening  of  the  accident,  the 
law  does  not  permit  him  to  recover,  and  the  case  should  not  have 
been  submitted  to  the  jury. 

Judgment  of  the  court  below  is  reversed  and  is  here  entered  for 
the  defendant. 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  181 

QUESTIONS 

1.  But  for  the  negligence  of  the  defendant  in  this  case  the  plaintiff  would 
not    have   been   injured.     Why    then    was   judgment    given   for    the 
defendant  ? 

2.  P,  an  employee  of  D,  worked  at  night  and  in  his  work  passed  to  and 
fro  on  a  platform  constructed  and  maintained  by  D.     D  furnished  P 
a  lantern  to  use  while  engaged  in  his  work.    One  night  while  working 
without  the  lantern  P  sustained  an  injury.    P  sues  D  for  damages 
alleging  and  proving  that  the  platform  was  an  unsafe  place  on  which  to 
work.    D  contends  (i)  that  P,  by  remaining  in  his  employ  with  knowl- 
edge of  the  unsafeness  of  the  platform,  assumed  the  risk  of  injury;  and 
(2)  that,  in  any  event,  his  injury  was  caused  by  his  contributory  negli- 
gence in  not  having  with  him  his  lantern  when  he  was  injured.    What 
decision  ? 

3.  P,  a  switchman  in  the  employ  of  D,  negligently  exposed  himself  to  danger 
by  walking  on  an  open  trestle  in  front  of  a  moving  switch  engine.     X, 
the  engineer,  saw  the  perilous  position  of  P  but  applied  the  brakes  too 
late  to  avoid  hitting  him.    X  was  an  incompetent  employee  and  his 
incompetency  was  known  to  D.    P  sues  D  for  damages.     D's  defense 
was  the  contributory  negligence  of  P.     What  decision  ? 

4.  Under  the'common  law  the  right  of  action  for  damage  for  a  negligent 
injury  resulting  in  death  did  not  survive  in  favor  of  the  next  of  kin  or 
personal  representative  of  the  deceased.    What  is  the  explanation  of 
this  rule  ?    Does  the  rule  still  obtain  ? 

ii.   RISKS  NOT  ASSUMED  BY  THE  EMPLOYEE 

SAUNDERS  v.   EASTERN  HYDRAULIC  BRICK  COMPANY 
63  New  Jersey  Law  554  (1899) 

MAGIE,  C.  J.  The  judgment  in  this  record  was  founded  upon  a 
nonsuit  directed  by  the  trial  judge  at  the  trial  of  the  issue  made  by 
the  pleadings.  The  action  was  in  tort  for  damages  for  an  injury 
suffered  by  plaintiff.  The  bill  of  exceptions  shows  that  the  direction 
of  the  trial  judge  proceeded  upon  the  ground  that  the  evidence  did 
not  establish  any  liability  on  the  part  of  the  defendant  to  answer  for 
the  injury  received  by  the  plaintiff  for  which  he  was  prosecuting  his 
suit,  and  upon  the  further  ground  that  plaintiff's  conduct  was  negli- 
gent and  his  negligence  contributed  to  his  injury. 

The  sole  ground  of  complaint  urged  for  the  reversal  of  the  judg- 
ment is  the  alleged  error  of  the  trial  judge  in  directing  the  nonsuit. 

At  the  time  the  nonsuit  was  allowed  the  evidence  may  be  con- 
sidered to  have  established  the  following  facts:  Plaintiff  was  a  work- 
man in  the  employ  of  the  defendant.  One  of  the  defendant's  buildings 


i82  LAW  AND  BUSINESS 

in  which  it  carried  on  its  business  had  a  roof,  nearly  flat,  in  which 
was  a  "skylight"  fitted  for  two  panes  of  glass,  20X40.  The  skylight 
was  on  about  the  same  plane  as  the  roof,  and  there  was  what  plaintiff 
calls  a  "mutton,"  meaning  no  doubt,  a  mullion,  dividing  the  frame 
and  sustaining  the  contiguous  parts  of  the  panes  of  glass.  One  of 
the  panes  was  broken,  and  plaintiff,  who  was  a  glazier,  was  directed 
by  someone  having  authority  from  defendant  to  go  upon  the  roof 
and  put  a  new  pane  in  the  place  of  the  broken  one.  In  attempting 
to  do  this,  plaintiff  put  his  hand  upon  the  centerpiece  or  mullion  and 
leaned  with  so  much  of  the  weight  of  his  body  upon  it  as  to  break  it. 
He  had  assumed  such  an  attitude  or  position  that,  upon  the  breaking 
of  the  centerpiece,  he  fell  headforemost  through  the  window  and 
received  by  that  fall  the  injury  of  which  he  complained. 

The  rule  of  duty  of  the  master  applicable  to  the  case  admits  of 
no  doubt  or  dispute.  He  is  bound  to  take  reasonable  care  to  have 
the  place  in  which  he  directs  his  servant  to  work  reasonably  safe  for 
the  doing  of  that  work,  and  free  from  latent  or  concealed  dangers. 
Electric  Co.  v.  Kelley,  28  Vroom  100;  Comben  v.  Bellmlle  Stone  Co., 
30  Id.  226.  Had  plaintiff  received  his  injury  by  falling  through  the 
roof  on  which  he  was  directed  to  work,  by  reason  of  a  defect  in  its 
construction,  he  might  claim  that  defendant  was  liable  for  his  injury, 
and  a  question  for  a  jury  would  arise  whether  the  master,  in  respect 
to  the  construction  of  the  roof,  had  used  the  required  care.  Under 
such  circumstances  the  roof  was  a  place  furnished  by  the  master  for 
his  servant  to  work  upon. 

But  the  purpose  of  the  mullion  in  this  skylight  was  to  aid  in  the 
support  of  the  panes  of  glass.  The  master's  duty  was  to  have  it  so 
constructed  as  to  reasonably  answer  that  purpose,  but  it  is  impossible 
to  discover  any  ground  in  reason  for  imposing  upon  the  master  any 
duty  to  have  it  so  constructed  as  to  bear  the  weight  or  any  part  of 
the  weight  of  a  servant,  although  engaged  in  repairing  it. 

The  duty  of  the  master  in  this  respect  is  like  that  of  one  who 
invites  another  to  make  use  of  some  place  or  appliance  and  is  limited 
to  the  care  requisite  for  the  reasonable  use  thereof  for  the  purpose  for 
which  it  is  designed.  New  York  and  New  Jersey  Telephone  Co.  v. 
Speicher,  30  Vroom  23;  S.C.  31  Id.  242. 

Doubtless  the  work  of  replacing  the  glass  would  have  required 
the  use  of  some  force  upon  the  mullion  to  remove  the  old  putty. 
The  case  indicates  that  the  mullion  broke  under  plaintiff's  pressure 
before  he  had  begun  to  exert  force  for  that  purpose.  In  that  aspect 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  183 

it  is  plain  that  defendant  was  not  liable  for  plaintiff's  injury,  because, 
as  just  stated,  it  owed  him  no  duty  to  furnish  mullion  strong  enough 
to  bear  his  weight  or  any  part  of  it. 

The  judgment  must  be  affirmed. 

QUESTIONS 

1.  Why  should  the  master  be  under  a  duty  to  furnish  his  employees  a 
reasonably  safe  place  in  which  to  work?    Did  the  defendant  in  the 
principal  case  furnish  the  plaintiff  with  a  reasonably  safe  place  in  which 
to  work  ? 

2.  P  was  employed  by  D  in  the  latter's  warehouse.     Frequently  P  went 
into  D's  manufacturing  plant  which  was  near  the  warehouse  and  idled 
there.    While  in  the  manufacturing  plant  on  one  occasion,  P  was  injured 
as  a  result  of  the  unsafeness  of  the  premises.    What  decision  in  an 
action  by  P  against  D  for  damages  ? 

3.  D  employed  P  and  others  to  paint  a  building  for  him.     The  contract 
required  P  and  others  to  build  a  scaffolding  as  they  worked.     P,  while 
engaged  in  erecting  the  scaffolding,  was  injured  by  reason  of  the  defective 
construction  of  the  scaffolding.     What   decision  in  an  action  by  P 
against  D  for  damages  ? 

4.  Is  the  employer  under  any  duty  to  warn  an  employee  concerning  the 
usual  and  ordinary  dangers  of  his  premises  ? 

5.  Is  the  employer  under  any  duty  to  warn  a  servant  concerning  unusual 
or  secret  dangers  of  his  premises  ?    What  is  the  effect  of  the  employer's 
giving  warning  to  his  employees  of  secret  and  unusual  dangers  of  the 
employer's  premises  ? 

6.  P  sustains  an  injury  by  reason  of  the  unsafeness  of  his  employer's  prem- 
ises.    In  an  action  by  P  against  D  for  damages,  D  pleads  that  P  knew 
of  the  unsafeness  of  the  premises  and  raised  no  objection.     What 
decision  ? 

RICHMOND  &  DANVILLE  RAILROAD  COMPANY  v.  JONES 

92  Alabama  Reports  218  (1890) 

This  action  was  brought  by  D.  W.  Jones,  against  the  appellant 
corporation,  to  recover  damages  for  personal  injuries  alleged  to  have 
been  inflicted  by  reason  of  the  negligence  of  the  defendant.  There 
were  three  counts  in  the  complaint.  The  first  count  sought  to  recover 
on  the  ground  that  the  injuries  were  caused  by  reason  of  defects  in 
the  condition  of  the  ways,  works,  machinery,  or  plant  connected 
with  or  used  in  the  employ  of  defendant. 

The  circumstances  of  the  accident  are  substantially  as  follows: 
The  plaintiff  was  in  the  employ  of  defendant  as  switchman  and  went 


184  LAW  AND  BUSINESS 

between  the  cars  while  in  motion  for  the  purpose  of  uncoupling  them, 
and  while  between  the  cars  he  gave  a  signal,  by  means  of  his  lantern, 
for  the  engine  to  go  ahead,  and  at  the  time  the  cars  which  had  been 
uncoupled  rolled  off  from  the  engine  a  distance  of  four  or  five  feet, 
and  the  engine  instead  of  going  ahead  backed  and  struck  the 
uncoupled  cars,  by  means  of  which  collision  the  plaintiff,  who  was 
still  standing  on  the  footboard  of  the  tender  of  the  engine,  was  mashed, 
mangled,  and  bruised,  for  which  injury  he  brings  this  action. 

The  evidence  is  conflicting  in  many  particulars.  The  testimony 
of  the  plaintiff  tends  to  show  that  the  drawhead  of  the  tender  of  the 
engine  was  defective,  and  that  in  the  discharge  of  the  duties  incum- 
bent upon  him  as  employee  of  the  defendant,  it  was  necessary  that 
he  should  go  between  the  moving  cars;  that  while  there  and  after 
he  had  uncoupled  the  cars,  he  gave  a  signal  to  the  engineer,  through 
the  fireman,  to  go  ahead,  and  that  this  signal  was  not  obeyed.  The 
testimony  of  the  defendant  contradicts  all  of  these  facts.  The  facts 
and  circumstances  attending  the  offer  of  the  defendant  to  introduce 
in  evidence  the  written  contract  of  employment  between  the  plaintiff 
and  the  defendant,  to  which  plaintiff  objected,  are  sufficiently  set 
out  in  the  opinion.  There  were  many  objections  on  the  part  of  the 
defendant  to  evidence,  introduced  by  the  plaintiff,  going  to  show  that 
the  drawhead  used  on  the  engine  in  question  was  defective.  On  the 
examination  of  one  of  the  witnesses  for  the  plaintiff  he  was  asked  by 
the  plaintiff  if  the  drawhead  on  the  engine  upon  which  plaintiff  was 
riding  was  such  as  were  ordinarily  used  on  well-regulated  railroads. 
Upon  objection  by  the  defendant  to  this  question,  the  court  asked 
the  witness  the  following  question:  "Do  you  know  how  drawheads 
used  on  well-regulated  roads  compare  with  the  said  drawhead  in 
question,  used  in  the  defendant's  yards?"  to  which  the  witness 
answered  that  he  did.  The  court  then  asked:  "How  do  said  draw- 
heads  compare  with  those  used  by  well-regulated  and  well-conducted 
railroads?"  Witness  answered  that  he  "did  not  think  they  com- 
pared very  favorably."  To  each  of  these  questions  by  the  court 
and  to  the  answers  thereto  the  defendant  separately  and  severally 
objected  and  reserved  an  exception  to  the  court's  overruling  its  said 
objections. 

There  was  judgment  for  the  plaintiff;  and  defendant  prosecutes 
this  appeal,  and  assigns  the  various  rulings  of  the  court  as  error. 

COLEMAN,  J.  The  suit  was  brought  by  appellee  to  recover  damages 
for  personal  injury.  For  defense  to  the  action,  by  way  of  special 
plea,  the  defendant  set  up  Rule  No.  23,  which  will  be  found  in  the 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  185 

statement  of  the  facts  of  the  case.  To  this  plea  a  demurrer  was 
sustained.  In  the  case  of  the  Louisville  6°  Nashville  Railroad  v.  Or, 
91  Ala.  548;  8  So.  Rep.  360,  it  is  declared  that  "Railroads  cannot 
stipulate  for  immunity  from  liability  for  their  own  wrongful  negligence.- 
A  rule  which  imposes  upon  an  employee  to  look  after  and  be  respon- 
sible for  his  own  safety  contravenes  the  law  itself,  which  fixes  the 
liability  of  railroads  for  negligence  causing  injury  or  death  to  their 
employees."  The  demurrer  was  properly  sustained. 

It  is  the  duty  of  railroads  to  keep  themselves  reasonably  abreast 
with  improved  methods  so  as  to  lessen  the  danger  attendant  on  the 
service,  and  while  they  are  not  required  to  adopt  every  new  invention, 
it  is  their  duty  to  adopt  such  as  are  in  ordinary  use  by  prudently 
conducted  roads  engaged  in  like  business,  and  surrounded  by  like 
circumstances.  Georgia  Pacific  Railway  Co.  v.  Propst,  83  Ala.  518. 
There  have  been  such  advancements  in  science,  for  the  control  of 
steam,  and  improvements  in  the  machinery  and  appliances  used  by 
railroads,  for  the  better  security  of  life,  limb,  and  property,  that  it 
would  be  inexcusable  to  continue  to  use  old  methods,  machinery,  and 
appliances  known  to  be  attended  with  more  or  less  danger,  when  the 
danger  could  be  reasonably  avoided  by  the  adoption  of  the  newer  and 
which  are  in  general  used  by  well-regulated  railroads.  Not  that  it 
is  required  of  them  to  adopt  every  new  invention  useful  in  the  busi- 
ness, although  it  may  serve  to  lessen  danger,  but  it  is  their  duty  to  dis- 
continue old  methods  which  are  insecure,  and  to  adopt  such  improve- 
ments and  advancements  as  are  in  ordinary  use  by  prudently 
conducted  roads  engaged  in  like  business  and  surrounded  by  like 
circumstances.  Louisville  &  Nashville  Railway  Co.  v.  Allen,  78  Ala. 
494.  Applying  this  principle  in  the  case  of  the  Georgia  Pacific  Rail- 
way Co.  v.  Propst,  83  Ala.  526,  the  court  held  that  "if  the  drawheads 
and  bumpers  used  by  defendant  were  such  as  were  employed  by  many 
well  conducted  roads,  this  would  repel  all  imputation  of  negligence 
founded  on  mere  structure,  although  other  roads,  even  a  majority  of 
them,  adopted  a  different  pattern."  Witnesses  who  have  sufficient 
knowledge  of  the  subject  may  testify  to  the  general  rules  of  railroads 
on  the  subject.  The  same  general  principle  is  declared  in  the  case  of 
Louisville  6*  Nashville  Railway  Co.  v.  Hall,  87  Ala.  707.  Under  these 
rules,  we  think  it  was  proper  to  inquire  whether  the  drawheads  used 
by  defendant,  when  the  injury  occurred,  was  such  as  were  usually 
used  on  well-regulated  railroads.  The  witnesses  were  shown  to  be 
experts,  and  were  competent  to  give  such  testimony. 

Affirmed. 


1 86  LAW  AND  BUSINESS 

QUESTIONS 

1.  The  court  at  the  trial  of  this  case  admitted  evidence  that  the  drawhead 
used  by  the  defendant  in  this  case  did  not  compare  favorably  with 
drawheads  used  by  other  companies.     What  was  the  justification  for 
admitting  this  evidence  ? 

2.  P  has  in  his  possession  a  tool  defective  for  the  purpose  for  which  it  is 
intended.    While  using  it  for  a  purpose  for  which  it  was  not  intended, 
P  receives  a  serious  injury  because  of  its  defective  character.     P  sues 
D  for  damages.    What  decision  ? 

3.  P  was  injured  by  the  explosion  of  the  boiler  of  an  engine  which  he  was 
operating.    The  explosion  occurred  as  a  result  of  broken  and  corroded 
stay  bolts.    The  engine  had  been  sent  several  times  to  the  shops  for 
repairs,  but  the  defects  in  question  were  never  entirely  remedied.     P 
sues  for  damages.     What  decision  ? 

4.  In  the  foregoing  case,  P  knows  of  the  defects  in  the  boiler  but  continues 
in  D's  employ  without  making  any  complaints.     P  sues  D  for  damages 
resulting  from  an  explosion  caused  by  the  defects.    What  decision  ? 

5.  When  P  learned  of  the  defects  in  question  he  immediately  notified  his 
employer  of  them.    His  employer  promised  to  make  the  necessary 
repairs.    Two  weeks  later,   before  the  repairs  have  been  made,   an 
explosion  occurred  resulting  in  P's  injury.    What  decision  in  an  action 
by  P  against  D  for  damages  ? 

6.  Is  an  employer  under  a  duty  to  inspect  and  repair  tools,  appliances,  and 
machinery  ?    If  so,  what  is  the  scope  of  this  duty  ? 

7.  By  what  standard  is  the  safeness  of  tools,  appliances,  and  machinery  to 
be  tested  ? 

NORFOLK  &  WESTERN  RAILROAD  COMPANY  v.  HOOVER 
79  Maryland  Reports  253  (1894) 

MCSHERRY,  J.  This  is  an  action  brought  to  recover  damages  for 
personal  injuries  received  by  the  appellee,  an  employee  of  the  Norfolk 
and  Western  Railroad  Co.,  as  a  result  of  alleged  negligence  on  the 
part  of  his  fellow-servants.  The  verdict  and  judgment  were  in  his 
favor,  and  the  company  has  appealed.  In  the  record  there  are  three 
bills  of  exceptions  upon  which  the  questions  to  be  considered  arise. 
Two  of  these  exceptions  were  reserved  by  the  appellant  and  one  by 
the  appellee. 

It  appears  that  in  May,  1891,  an  extra  train  of  loaded  freight 
cars  was  started  from  Shenandoah,  Virginia,  about  eleven- thirty  P.M., 
to  run  through  to  Hagerstown,  Maryland.  The  crew  consisted  of  a 
conductor,  an  engineman,  a  fireman,  a  flagman,  and  two  brakemen. 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  187 

Hoover,  the  appellee,  was  the  engineman.  As  the  train  proceeded 
northward,  it  descended  some  heavy  grades,  and  the  engineman 
noticed  that  its  speed  was  not  kept  under  proper  control  by  the 
brakeman.  At  Luray  the  train  laid  over  for  an  hour,  and  the  engine- 
man  requested  the  brakeman  not  to  let  him  down  the  hills  so  rapidly, 
as  the  night  was  quite  foggy.  After  leaving  Luray  they  ascended  the 
grade  to  Vaughn's  Summit,  turning  that  point  at  a  speed  of  about 
ten  miles  an  hour.  Immediately  upon  passing  the  Summit,  the 
appellee  shut  off  the  steam  so  that  the  train  might  descend  by  gravity 
alone,  without  aid  from  the  engine.  When  about  a  train's  length 
over  the  hill  he  discovered  that  the  train  was  increasing  its  speed, 
and  he  applied  the  tank  brake;  but  this  producing  no  effect,  he  blew 
for  brakes,  turned  on  the  driver  brakes  and  applied  sand  to  the  track. 
This  not  checking  the  train,  he  again  blew  for  brakes  and  reversed 
his  engine.  He  repeated  his  signal  for  brakes  at  least  once,  and 
probably  twice  afterward,  but  they  seem  not  to  have  been  heeded 
by  the  brakemen,  for  the  train  moved  rapidly  onward  down  the 
grade.  The  packing  blew  out  of  the  cylinder,  and  this  caused  the 
train  to  plunge  forward,  throwing  the  appellee  back  into  the  tender. 
At  this  juncture,  as  they  were  rapidly  approaching,  and  were  only 
some  ten  or  twelve  car  lengths  distant  from,  Possum  Hollow,  which 
is  crossed  upon  a  trestle  seventy-five  or  eighty  feet  high,  the  appellee 
saw  that  a  collision  with  another  freight  train  standing  or  moving 
very  slowly  northward  on  the  trestle,  was  imminent  and  unavoidable; 
and  to  save  himself,  jumped  from  his  engine  and  received  the  injuries 
for  which  he  has  brought  the  pending  suit. 

There  was  evidence  offered  tending  to  prove  that  Huyett,  one  of 
the  brakemen,  had  been  drinking  that  night  before  the  accident 
happened;  and  within  thirty  minutes  prior  to  the  collision  his  breath 
gave  unmistakable  evidence  of  it.  In  this  state  of  the  proof,  a  witness 
was  asked  whether  he  knew  the  general  reputation  of  Huyett  and 
Reese,  the  two  brakemen,  for  sobriety  for  one  or  two  years  before  the 
accident  and  following  that;  and  if  so,  to  state  what  that  reputation 
was.  To  this  question  and  the  evidence  sought  to  be  elicited  thereby, 
the  appellant  objected,  but  the  court  permitted  the  question  to  be 
asked  and  answered,  and  this  ruling  forms  the  subject  of  the  first 
exception. 

It  has  been  repeatedly  held  by 'this  court,  and  is  the  settled  and 
established  doctrine  of  Maryland,  that  in  actions  of  this  character, 
where  a  servant  sues  his  master  for  injuries  resulting  from  the  negli- 


1 88  LAW  AND  BUSINESS 

gence  of  a  fellow-servant,  the  plaintiff,  to  succeed,  must  prove,  not 
only  that  some  negligence  of  the  fellow-servant  caused  the  injury,  but 
also  that  the  master  has  himself  been  guilty  of  negligence,  either  in 
the  selection  of  the  negligent  fellow-servant  in  the  first  instance,  or 
in  retaining  him  in  his  service  afterward.  Mere  negligence  on  the 
part  of  the  fellow-servant,  though  resulting  in  an  injury,  will  not 
suffice  to  support  the  action,  because  the  master  does  not  insure  one 
employee  against  the  carelessness  of  another.  But  he  owes  to  each 
of  his  servants  the  duty  of  using  reasonable  care  and  caution  in  the 
selection  of  competent  fellow-servants,  and  in  the  retention  in  his 
service  of  none  but  those  who  are.  If  he  does  not  perform  this  duty, 
and  an  injury  is  occasioned  by  the  negligence  of  an  incompetent  or 
careless  servant,  the  master  is  responsible  to  the  injured  employee, 
not  for  the  mere  negligent  act  or  omission  of  the  incompetent  or 
careless  servant,  but  for  his  own  negligence  in  not  discharging  his 
own  duty  toward  the  injured  servant.  As  this  negligence  of  the 
master  must  be  proved,  it  may  be  proved  like  any  other  fact,  either 
by  direct  evidence  or  by  the  proof  of  circumstances  from  which  its 
existence  may,  as  a  conclusion  of  fact,  be  fairly  and  reasonably 
inferred.  That  drunkenness  on  the  part  of  a  railroad  employee 
renders  him  an  incompetent  servant  will  scarcely  be  disputed;  nor 
can  it  be  questioned  that  a  master  who  knowingly  employs  such  a 
servant,  or  who,  knowing  his  habits,  retains  him  in  his  service,  would 
be  guilty  of  a  reckless  and  wanton  breach  of  duty,  not  only  to  the 
public  but  to  every  employee  in  his  service.  There  is  no  evidence 
in  the  record,  nor  has  there  been  a  suggestion,  that  either  the  con- 
ductor, fireman,  or  flagman  of  the  train  was  negligent  or  incompetent. 
The  negligence  which  directly  caused  the  accident  is  attributed  solely 
to  the  brakemen;  and  the  appellant's  negligence  which,  as  it  is  claimed, 
fixed  its  liability,  lies  in  its  employment  of,  or  continuing  to  retain  in 
its  service,  these  dissipated  or  intemperate  brakemen.  But,  as  we 
have  stated,  it  was  necessary  for  the  plaintiff  to  show  not  only  their 
employment,  but  that  the  company  had  not  used  due  and  ordinary 
care  in  selecting  them.  There  was  no  direct  evidence  adduced  to 
show  the  absence  of  such  care;  but  the  question  excepted  to,  and  the 
evidence  elicited  in  response  to  it,  were  designed  to  show  by  indirect 
or  circumstantial  evidence  that  the  company  had  not  used  the  degree 
of  care  and  caution  in  the  selection  of  these  brakemen  that  its  duty 
imperatively  required  it  to  use.  So  the  question  is,  Can  you  fix 
upon  the  master  a  failure  to  use  due  care  in  selecting  careful  servants 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  189 

by  showing  such  notorious  or  general  reputation  respecting  the 
servant's  unfitness  or  incompetency  as  that  the  master  could  not, 
without  negligence  on  his  part,  have  been  ignorant  of  it  when  he 
employed  the  servant?  About  this  there  ought  to  be  no  difficulty^ 
If  the  servant's  general  reputation  before  employment  is  so  notorious 
as  to  unfitness  as  that  it  must  have  been  known  to  the  master  but  for 
his,  the  master's,  negligence  in  not  informing  himself — if  he  could  have 
been  ignorant  of  it  only  because  he  failed  to  make  investigation — 
then,  it  is  obvious  that  he  has  not  used  the  care  and  caution  which 
the  law  demands  of  him  in  selecting  his  employees.  Hence,  "the 
servant's  general  reputation  for  unfitness  may  be  sufficient  to  over- 
come the  presumption  that  the  master  used  due  care  in  his  selection, 
even  though  actual  knowledge  of  such  reputation  for  unfitness  on 
the  master's  part  is  not  shown."  Wood,  Master  and  Servant,  sec- 
tion 420.  In  Dams  v.  The  Detroit  6°  Milwaukee  Railroad  Co.,  20 
Mich.  124,  COOLEY,  J.,  speaking  for  the  court,  adopts  the  case  of 
Oilman  v.  Eastern  Railroad  Corporation,  10  Allen,  223,  which  puts 
upon  the  employer  the  responsibility  of  negligently  employing  an 
unfit  person,  generally  known  and  reputed  to  be  such,  notwithstand- 
ing the  employer  may  in  fact  have  been  ignorant  of  such  unfitness. 
Continuing,  he  said:  "The  ignorance  itself  is  negligence  hi  a  case 
in  which  any  proper  inquiry  would  have  obtained  the  necessary  in- 
formation, and  where  the  duty  to  inquire  was  plainly  imperative." 

The  evidence  offered  and  admitted  had  no  relation  to  specific  or 
isolated  acts  of  negligence.  These,  unless  brought  home  to  the 
knowledge  of  the  master,  would  not  have  been  admissible  as  reflecting 
on  the  question  of  the  master's  care.  Baltimore  Elevator  Co.  v.  Neal, 
65  Md.  438.  We  think,  for  the  reasons  we  have  given,  and  upon  the 
authorities  we  have  cited,  there  was  no  error  committed  in  allowing 
the  question  excepted  to  in  the  first  bill  of  exception  to  be  put  and 
answered. 

Under  this  ruling  quite  a  number  of  witnesses  testified  to  Huyett's 
general  reputation  for  intemperance,  extending  from  a  period  long 
anterior  to  his  employment  by  the  appellant  up  to  and  after  the 
accident.  One  witness,  Eyler,  gave  evidence  as  to  Reese's  general 
reputation.  With  respect  to  Huyett,  the  evidence,  if  credited  by 
the  jury,  showed  a  general  reputation  covering  many  years  uninter- 
ruptedly and  of  such  a  notorious  character  that  a  jury  might  well 
have  inferred  it  was  known  to  the  master  when  Huyett  was  employed, 
or  else  that  the  master  failed  to  know  it  only  because  of  neglecting 


190  LAW  AND  BUSINESS 

to  make  proper  inquiry.  There  was,  consequently,  evidence  legally 
sufficient  to  go  to  the  jury  upon  the  subject  of  the  company's  negli- 
gence, and,  therefore,  there  was  no  error  in  rejecting  the  appellant's 
first  and  fifth  prayers  which  sought  to  take  the  case  from  the  con- 
sideration of  the  jury,  nor  in  rejecting  its  fourth  prayer,  which  sought 
to  exclude  this  evidence  from  the  case. 

Affirmed. 

QUESTIONS 

1.  Did  it  appear  in  this  case  that  the  defendant  knew  of  the  incompetency 
of  the  brakemen  ?    If  not,  why  should  it  be  held  responsible  for  their 
negligence  on  the  occasion  in  question  ? 

2.  Did  the  defendant's  negligence  consist  in  negligently  employing  incompe- 
tent brakemen  or  in  retaining  them  in  its  employment  after  knowing  of 
their  incompetency  ? 

3.  Suppose  that  the  engineer  had  known  of  the  incompetency  of  the  brake- 
men  but  had  never  made  any  report  of  the  fact  to  his  employer,  would 
the  decision  in  the  principal  case  have  been  the  same  ? 

4.  The  D  Company  sent  out  a  train  with  two  brakemen  when  there  should 
have  been  three.    A  wreck  occurred  which  could  have  been  avoided  if 
the  train  had  been  manned  by  three  brakemen.     P,  the  conductor,  sues 
for  injuries  sustained  in  the  wreck.     What  decision  ? 

5.  It  is  usually  said  that  the  master  is  under  a  duty  to  make  reasonable 
rules  and  regulations  for  the  government  of  the  operations  of  his  business, 
particularly  where  those  operations  are  dangerous  and  complex,  and  that 
the  master  is  under  a  duty  to  use  reasonable  care  in  seeing  that  these 
rules  and  regulations  are  enforced.    Why  should  these  duties  be  imposed 
upon  a  master  ? 

b)     Under  Modern  Legislation 

1.      IN   GENERAL 

NEW  YORK  CENTRAL  RAILROAD   COMPANY  v.  WHITE 

243  United  States  Reports  188  (1916) 

PITNEY,  J.  A  proceeding  was  commenced  by  defendant  in  error 
before  the  Workmen's  Compensation  Commission  of  the  State  of 
New  York,  established  by  the  Workmen's  Compensation  Law  of 
that  state,1  to  recover  compensation  from  the  New  York  Central  & 
Hudson  River  Railroad  Co.  for  the  death  of  her  husband,  Jacob 
White,  who  lost  his  life  September  2,  1914,  through  an  accidental 

1  Chapter  816,  Laws  1913,  as  re-enacted  and  amended  by  c.  41,  Laws  1914, 
and  amended  by  c.  316,  Laws  1914. 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE     191 

injury  arising  out  of  and  in  the  course  of  his  employment  under  that 
company.  The  commission  awarded  compensation  in  accordance 
with  the  terms  of  the  law;  its  award  was  affirmed,  without  opinion, 
by  the  Appellate  Division  of  the  Supreme  for  the  Third  Judicial 
Department,  whose  order  was  affirmed  by  the  Court  of  Appeals,  with- 
out opinion.  169  App.  Div.  903;  216  N.Y.  653.  Federal  questions 
having  been  saved,  the  present  writ  of  error  was  sued  out  by  the  New 
York  Central  Railroad  Co.,  successor,  through  a  consolidation  of 
corporations,  to  the  rights  and  liabilities  of  the  employing  company. 
The  writ  was  directed  to  the  Appellate  Division,  to  which  the  record 
and  proceedings  had  been  remitted  by  the  Court  of  Appeals.  Sioux 
Remedy  Co.  v.  Cope,  235  U.S.  197,  200. 

The  errors  specified  are  based  upon  these  contentions:  (i)  That 
the  liability,  if  any,  of  the  railroad  company  for  the  death  of  Jacob 
White  is  defined  and  limited  exclusively  by  the  provisions  of  the 
Federal  Employers'  Liability  Act  of  April  22,  1908,  c.  149,  35  Stat. 
65;1  and  (2)  that  to  award  compensation  to  defendant  in  error  under 
the  provisions  of  the  Workmen's  Compensation  Law  would  deprive 
plaintiff  in  error  of  its  property  without  due  process  of  law,  and  deny 
to  it  the  equal  protection  of  the  laws,  in  contravention  of  the  Fourteenth 
Amendment. 

We  turn  to  the  constitutional  question.  The  Workmen's  Compen- 
sation Law  of  New  York  establishes  forty-two  groups  of  hazardous 
employments,  defines  " employee"  as  a  person  engaged  in  one  of 
these  employments  upon  the  premises  or  at  the  plant  or  in  the  course 
of  his  employment  away  from  the  plant  of  his  employer,  but  exclud- 
ing farm  laborers  and  domestic  servants;  defines  " employment"  as 
including  employment  only  in  a  trade,  business,  or  occupation 
carried  on  by  the  employer  for  pecuniary  gain;  " injury"  and 
" personal  injury"  as  meaning  only  accidental  injuries  arising  out  of 
and  in  the  course  of  employment,  and  such  disease  or  infection  as 
naturally  and  unavoidably  may  result  therefrom;  and  requires  every 
employer  subject  to  its  provisions  to  pay  or  provide  compensation 
according  to  a  prescribed  schedule  for  the  disability  or  death  of  his 
employee  resulting  from  an  accidental  personal  injury  arising  out  of 
and  in  the  course  of  the  employment,  without  regard  to  fault  as  a 
cause  except  where  the  injury  is  occasioned  by  the  wilful  intention 
of  the  injured  employee  to  bring  about  the  injury  or  death  of  him- 

1  Discussion  of  this  point  omitted. 


192  LAW  AND  BUSINESS 

self  or  of  another,  or  where  it  results  solely  from  the  intoxication  of 
the  injured  employee  while  on  duty,  in  which  cases  neither  the  injured 
employee  nor  any  dependent  shall  receive  compensation.  By  section 
ii  the  prescribed  liability  is  made  exclusive,  except  that,  if  an 
employer  fail  to  secure  the  payment  of  compensation  as  provided  in 
section  50,  an  injured  employee,  or  his  legal  representative  in  case 
death  results  from  the  injury,  may  at  his  option  elect  to  claim  com- 
pensation under  the  act  or  to  maintain  an  action  in  the  courts  for 
damages,  and  in  such  an  action,  it  shall  not  be  necessary  to  plead  or 
prove  freedom  from  contributory  negligence,  nor  may  the  defendant 
plead  as  a  defense  that  the  injury  was  caused  by  the  negligence  of  a 
fellow-servant,  that  the  employee  assumed  the  risk  of  his  employ- 
ment, or  that  the  injury  was  due  to  contributory  negligence.  Com- 
pensation under  the  act  is  not  regulated  by  the  measure  of  damages 
applied  in  negligence  suits,  but  in  addition  to  providing  medical, 
surgical,  or  other  like  treatment,  it  is  based  solely  on  loss  of  earning 
power,  being  graduated  according  to  the  average  weekly  wages  of 
the  injured  employee  and  the  character  and  duration  of  the  dis- 
ability, whether  partial  or  total,  temporary  or  permanent;  while  in 
case  the  injury  causes  death  the  compensation  is  known  as  a  death 
benefit,  and  includes  funeral  expenses  not  exceeding  one  hundred 
dollars,  payments  to  the  surviving  wife  (or  dependent  husband) 
during  widowhood  (or  dependent  widowerhood)  of  a  percentage  of 
the  average  wages  of  the  deceased,  and  if  there  be  a  surviving  child 
or  children  under  the  age  of  eighteen  years  and  additional  percentage 
of  such  wages  for  each  child  until  that  age  is  reached.  There  are 
provisions  invalidating  agreements  by  employees  to  waive  the  right 
to  compensation,  prohibiting  any  assignment,  release,  or  commuta- 
tion of  claims  for  compensation  or  benefits  except  as  provided  by 
the  act,  exempting  them  from  the  claims  of  creditors,  and  requiring 
that  the  compensation  and  benefits  shall  be  paid  only  to  employees 
or  their  dependents.  Provision  is  made  for  the  establishment  of  a 
Workmen's  Compensation  Commission1  with  administrative  and 
judicial  functions,  including  authority  to  pass  upon  claims  to  com- 
pensation on  notice  to  the  parties  interested.  The  award  or  decision 
of  the  commission  is  made  subject  to  an  appeal,  on  questions  of  law 
only,  to  the  Appellate  Division  of  the  Supreme  Court  for  the  Third 
Department,  with  an  ultimate  appeal  to  the  Court  of  Appeals  in 

1  By  chap.  674,  Laws  1915,  sees.  2  and  8,  this  commission  was  abolished  and 
its  functions  were  conferred  upon  the  newly  created  Industrial  Commission. 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  193 

cases  where  such  an  appeal  would  lie  in  civil  actions.  A  fund  is 
created,  known  as  "the  state  insurance  fund,"  for  the  purpose  of 
insuring  employers  against  liability  under  the  law  and  assuring  to 
the  persons  entitled  the  compensation  thereby  provided.  The  fund 
is  made  up  primarily  of  premiums  received  from  employers,  at  rates 
fixed  by  the  commission  in  view  of  the  hazards  of  the  different  classes 
of  employment,  and  the  premiums  are  to  be  based  upon  the  total 
pay-roll  and  number  of  employees  in  each  class  at  the  lowest  rate 
consistent  with  the  maintenance  of  a  solvent  state  insurance  fund  and 
the  creation  of  a  reasonable  surplus  and  reserve.  Elaborate  provisions 
are  laid  down  for  the  administration  of  this  fund.  By  section  50, 
each  employer  is  required  to  secure  compensation  to  his  employees  in 
one  of  the  following  ways:  (i)  by  insuring  and  keeping  insured  the 
payment  of  such  compensation  in  the  state  fund;  or  (2)  through  any 
stock  corporation  or  mutual  association  authorized  to  transact  the 
business  of  workmen's  compensation  insurance  in  the  State;  or  (3) 
"By  furnishing  satisfactory  proof  to  the  commission  of  his  financial 
ability  to  pay  such  compensation  for  himself,  in  which  case  the  com- 
mission may,  in  its  discretion,  require  the  deposit  with  the  commission 
of  securities  of  the  kind  prescribed  in  section  thirteen  of  the  insurance 
law,  in  an  amount  to  be  determined  by  the  commission,  to  secure  his 
liability  to  pay  the  compensation  provided  in  this  chapter."  If  an 
employer  fails  to  comply  with  this  section  he  is  made  liable  to  a 
penalty  in  an  amount  equal  to  the  pro  rata  premium  that  would  have 
been  payable  for  insurance  in  the  state  fund  during  the  period  of 
non  compliance ;  besides  which,  his  injured  employees  or  their  depend- 
ents are  at  liberty  to  maintain  an  action  for  damages  in  the  courts,  as 
prescribed  by  section  n. 

In  a  previous  year,  the  legislature  enacted  a  compulsory  compensa- 
tion law  applicable  to  a  limited  number  of  specially  hazardous  employ- 
ments, and  requiring  the  employer  to  pay  compensation  without 
regard  to  fault.  Laws  1910,  chap.  674.  This  was  held  by  the  Court 
of  Appeals  in  Ives  v.  South  Buffalo  Railway  Co.,  201  N.Y.  271,  to  be 
invalid  because  in  conflict  with  the  due  process  of  law  provisions  of 
the  state  constitution  and  of  the  Fourteenth  Amendment.  There- 
after, and  in  the  year  1913,  a  constitutional  amendment  was  adopted, 
effective  January  i,  1914,  declaring: 

Nothing  contained  in  this  constitution  shall  be  construed  to  limit  the 
power  of  the  legislature  to  enact  laws  for  the  protection  of  the  lives,  health, 
or  safety  of  employees;  or  for  the  payment,  either  by  employers,  or 


IQ4  LAW  AND  BUSINESS 

by  employers  and  employees  or  otherwise,  either  directly  or  through  a 
state  or  other  system  of  insurance  or  otherwise,  of  compensation  for  injuries 
to  employees  or  for  death  of  employees  resulting  from  such  injuries  without 
regard  to  fault  as  a  cause  thereof,  except  where  the  injury  is  occasioned  by 
the  wilful  intention  of  the  injured  employee  to  bring  about  the  injury  or 
death  of  himself  or  of  another,  or  where  the  injury  results  solely  from  the 
intoxication  of  the  injured  employee  while  on  duty;  or  for  the  adjustment, 
determination,  and  settlement,  with  or  without  trial  by  jury,  of  issues  which 
may  arise  under  such  legislation;  or  to  provide  that  the  right  of  such  com- 
pensation, and  the  remedy  therefor,  shall  be  exclusive  of  all  other  rights 
and  remedies  for  injuries  to  employees  or  for  death  resulting  from  such 
injuries;  or  to  provide  that  the  amount  for  such  compensation  for  death 
shall  not  exceed  a  fixed  or  determinable  sum;  provided  that  all  moneys 
paid  by  an  employer  to  his  employees  or  their  legal  representatives,  by 
reason  of  the  enactment  of  any  of  the  laws  herein  authorized,  shall  be  held 
to  be  a  proper  charge  in  the  cost  of  operating  the  business  of  the  employer. 

In  December,  1913,  the  legislature  enacted  the  law  now  under 
consideration  (Laws,  1913,  c.  816),  and  in  1914  re-enacted  it  (Laws, 
1914,  c.  41)  to  take  effect  as  to  payment  of  compensation  on  July  i 
in  that  year.  The  act  was  sustained  by  the  Court  of  Appeals  as  not 
inconsistent  with  the  Fourteenth  Amendment  in  Matter  of  Jensen  v. 
Southern  Pacific  Co.j  215  N.Y.  514;  and  that  decision  was  followed 
in  the  case  at  bar. 

The  scheme  of  the  act  is  so  wide  a  departure  from  common-law 
standards  respecting  the  responsibility  of  employer  to  employee  that 
doubts  naturally  have  been  raised  respecting  its  constitutional 
validity.  The  adverse  considerations  urged  or  suggested  in  this  case 
and  in  kindred  cases  submitted  at  the  same  time  are:  (a)  that  the 
employer's  property  is  taken  without  due  process  of  law,  because  he 
is  subjected  to  a  liability  for  compensation1  without  regard  to  any 
neglect  or  default  on  his  part  or  on  the  part  of  any  other  person  for 
whom  he  is  responsible,  and  in  spite  of  the  fact  that  the  injury  may 
be  solely  attributable  to  the  fault  of  the  employee;  (b)  that  the 
employee's  rights  are  interfered  with  in  that  he  is  prevented  from 
having  compensation  for  injuries  arising  from  the  employer's  fault 
commensurate  with  the  damages  actually  sustained,  and  is  limited  to 
the  measure  of  compensation  prescribed  by  the  act;  and  (c)  that  both 
employer  and  employee  are  deprived  of  their  liberty  to  acquire 
property  by  being  prevented  from  making  such  agreement  as  they 
choose  respecting  the  terms  of  the  employment. 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  195 

In  support  of  the  legislation,  it  is  said  that  the  whole  common- 
law  doctrine  of  employer's  liability  for  negligence,  with  its  defenses 
of  contributory  negligence,  fellow-servant's  negligence,  and  assump- 
tion of  risk,  is  based  upon  fictions,  and  is  inapplicable  to  modern 
conditions  of  employment ;  that  in  the  highly  organized  and  hazardous 
industries  of  the  present  day  the  causes  of  accident  are  often  so  obscure 
and  complex  that  in  a  material  proportion  of  cases  it  is  impossible 
by  any  methods  correctly  to  ascertain  the  facts  necessary  to  form  an 
accurate  judgment,  and  in  a  still  larger  proportion  the  expense  and 
delay  required  for  such  ascertainment  amount  in  effect  to  a  defeat 
of  justice;  that  under  the  present  system  the  injured  workman  is 
left  to  bear  the  greater  part  of  industrial  accident  loss,  which  because 
of  his  limited  income  he  is  unable  to  sustain,  so  that  he  and  those 
dependent  upon  him  are  overcome  by  poverty  and  frequently  become 
a  burden  upon  public  or  private  charity;  and  that  litigation  is  unduly 
costly  and  tedious,  encouraging  corrupt  practices  and  arousing  antago- 
nisms between  employers  and  employees. 

In  considering  the  constitutional  question,  it  is  necessary  to  view 
the  matter  from  the  standpoint  of  the  employee  as  well  as  from  that 
of  the  employer.  For)  while  plaintiff  in  error  is  an  employer,  and 
cannot  succeed  without  showing  that  its  rights  as  such  are  infringed 
(Plymouth  Coal  Co.  v.  Pennsylvania,  232  U.S.  531,  544;  Jeffrey 
Manufacturing  Co.  v.  Blagg,  235  U.S.  571,  576),  yet,  as  pointed  out 
by  the  Court  of  Appeals  in  the  Jensen  Case,  215  N.Y.  526,  the  exemp- 
tion from  further  liability  is  an  essential  part  of  the  scheme,  so  that 
the  statute  if  invalid  as  against  the  employee  is  invalid  as  against  the 
employer. 

The  close  relation  of  the  rules  governing  responsibility  as  between 
employer  and  employee  to  the  fundamental  rights  of  liberty  and 
property  is  of  course  recognized.  But  those  rules,  as  guides  of 
conduct,  are  not  beyond  alteration  by  legislation  in  the  public  interest. 
No  person  has  a  vested  interest  in  any  rule  of  law  entitling  him  to 
insist  that  it  shall  remain  unchanged  for  his  benefit.  Munn  v.  Illinois, 
94  U.S.  113,  134;  Hurtado  v.  California,  no  U.S.  516,  532;  Martin  v. 
Pittsburgh  &  Lake  Erie  Railroad  Co.,  203  U.S.  284,  294;  Second 
Employers1  Liability  Cases,  223  U.S.  i,  50;  Chicago  &  Alton  Railroad 
Co.  v.  Tranbarger,  238  U.S.  67,  76.  The  common  law  bases  the 
employer's  liability  for  injuries  to  the  employee  upon  the  ground  of 
negligence;  but  negligence  is  merely  the  disregard  of  some  duty 


196  LAW  AND  BUSINESS 

imposed  by  law;  and  the  nature  and  extent  of  the  duty  may  be  modi- 
fied by  legislation  with  corresponding  change  in  the  test  of  negligence. 
Indeed,  liability  may  be  imposed  for  the  consequences  of  a  failure 
to  comply  with  a  statutory  duty,  irrespective  of  negligence  in  the 
ordinary  sense;  safety  appliance  acts  being  a  familiar  instance. 
St.  Louis,  Iron  Mountain  6s  Southern  Railway  Co.  v.  Taylor,  210  U.S. 
281,  295;  Texas  &•  Pacific  Railway  Co.  v.  Rigsby,  241  U.S.  33,  39,  43. 

The  fault  may  be  that  of  the  employer  himself,  or — most  fre- 
quently— that  of  another  for  whose  conduct  he  is  made  responsible 
according  to  the  maxim  respondeat  superior.  In  the  latter  case  the 
employer  may  be  entirely  blameless,  may  have  exercised  the  utmost 
human  foresight  to  safeguard  the  employee;  yet,  if  the  alter  ego 
while  acting  within  the  scope  of  his  duties  be  negligent — in 
disobedience,  it  may  be,  of  the  employer's  positive  and  specific 
command — the  employer  is  answerable  for  the  consequences.  It 
cannot  be  that  the  rule  embodied  in  the  maxim  is  unalterable  by 
legislation. 

The  immunity  of  the  employer  from  responsibility  to  an  employee 
for  the  negligence  of  a  fellow-employee  is  of  comparatively  recent 
origin,  it  being  the  product  of  the  judicial  conception  that  the  proba- 
bility of  a  fellow-workman's  negligence  is  one  of  the  natural  and 
ordinary  risks  of  the  occupation,  assumed  by  the  employee  and 
presumably  taken  into  account  in  the  fixing  of  his  wages.  The 
earliest  reported  cases  are  Murray  v.  South  Carolina  Railroad  Co. 
(1841),  i  McMull.  (S.C.)  385,  398;  Farwell  v.  Boston  &  Worcester 
Railroad  Corp.  (1842),  4  Mete.  49,  57;  Hutchinson  v.  York,  Newcastle 
6°  Berwick  Railway  Co.  (1850),  5  Exch.  343,  351,  19  L.J.  Exch.  296, 
299,  14  Jur.  837,  840;  Wigmore  V.  Jay  (1850),  5  Exch.  354,  19  LJ. 
Exch.  300,  14  Jur.  838,  841;  Bartonsshill  Coal  Co.  v.  Reid  (1858),  3 
Macq.  H.L.  Cas.  266,  284,  295.  And  see  Randall  v.  Baltimore  6* 
Ohio  Railroad  Co.,  109  U.S.  478,  483;  Northern  Pacific  Railroad  Co. 
v.  Herbert,  116  U.S.  642,  647.  The  doctrine  has  prevailed  generally 
throughout  the  United  States,  but  with  material  differences  in  different 
jurisdictions  respecting  who  should  be  deemed  a  fellow-servant  and 
who  a  vice-principal  or  alter  ego  of  the  master,  turning  sometimes 
upon  refined  distinctions  as  to  grades  and  departments  in  the  employ- 
ment. See  Knutter  v.  New  York  6*  New  Jersey  Telephone  Co.,  67 
N.J.L.  646,  650-53.  It  needs  no  argument  to  show  that  such  a  rule 
is  subject  to  modification  or  abrogation  by  a  state  upon  proper 
occasion. 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  197 

The  same  may  be  said  with  respect  to  the  general  doctrine  of 
assumption  of  risk.  By  the  common  law  the  employee  assumes 
the  risks  normally  incident  to  the  occupation  in  which  he  voluntarily 
engages;  other  and  extraordinary  risks  and  those  due  to  the 
employer's  negligence  he  does  not  assume  until  made  aware  of  them, 
or  until  they  become  so  obvious  that  an  ordinarily  prudent  man  would 
observe  and  appreciate  them,  in  either  of  which  cases  he  does 
assume  them,  if  he  continue  in  the  employment  without  obtaining 
from  the  employer  an  assurance  that  the  matter  will  be  remedied; 
but  if  he  receives  such  an  assurance,  then,  pending  performance  of 
the  promise,  the  employee  does  not  in  ordinary  cases  assume  the 
special  risk.  Seaboard  Air  Line  Railway  v.  Horton,  233  U.S.  492,  504; 
239  U.S.  595,  599.  Plainly,  these  rules,  as  guides  of  conduct  and  tests 
of  liability,  are  subject  to  change  in  the  exercise  of  the  sovereign 
authority  of  the  state. 

So,  also,  with  respect  to  contributory  negligence.  Aside  from 
injuries  intentionally  self-inflicted,  for  which  the  statute  under 
consideration  affords  no  compensation,  it  is  plain  that  the  rules  of 
law  upon  the  subject,  in  their  bearing  upon  the  employer's  responsi- 
bility, are  subject  to  legislative  change;  for  contributory  negligence, 
again,  involves  a  default  in  some  duty  resting  on  the  employee,  and 
his  duties  are  subject  to  modification. 

It  may  be  added,  by  way  of  reminder,  that  the  entire  matter  of 
liability  for  death  caused  by  wrongful  act,  both  within  and  without 
the  relation  of  employer  and  employee,  is  a  modern  statutory  innova- 
tion, in  which  the  states  differ  as  to  who  may  sue,  for  whose  benefit, 
and  the  measure  of  damages. 

It  is  true  that  in  the  case  of  the  statutes  thus  sustained  there 
were  reasons  rendering  the  particular  departures  appropriate.  Nor 
is  it  necessary,  for  the  purposes  of  the  present  case,  to  say  that  a 
state  might,  without  violence  to  the  constitutional  guaranty  of  "due 
process  of  law,"  suddenly  set  aside  all  common-law  rules  respecting 
liability  as  between  employer  and  employee,  without  providing  a 
reasonably  just  substitute.  Considering  the  vast  industrial  organ- 
ization of  the  state  of  New  York,  for  instance,  with  hundreds  of 
thousands  of  plants  and  millions  of  wage-earners,  each  employer  on 
the  one  hand  having  embarked  his  capital,  and  each  employee  on 
the  other  having  taken  up  his  particular  mode  of  earning  a  liveli- 
hood, in  reliance  upon  the  probable  permanence  of  an  established  body 
of  law  governing  the  relation,  it  perhaps  may  be  doubted  whether 


198  LAW  AND  BUSINESS 

the  state  could  abolish  all  rights  of  action  on  the  one  hand,  or  all 
defenses  on  the  other,  without  setting  up  something  adequate  in 
their  stead.  No  such  question  is  here  presented,  and  we  intimate 
no  opinion  upon  it.  The  statute  under  consideration  sets  aside  one 
body  of  rules  only  to  establish  another  system  in  its  place.  If  the 
employee  is  no  longer  able  to  recover  as  much  as  before  in  case  of 
being  injured  through  the  employer's  negligence,  he  is  entitled  to 
moderate  compensation  in  all  cases  of  injury,  and  has  a  certain  and 
speedy  remedy  without  the  difficulty  and  expense  of  establishing 
negligence  or  proving  the  amount  of  the  damages.  Instead  of  assum- 
ing the  entire  consequences  of  all  ordinary  risks  of  the  occupation, 
he  assumes  the  consequences,  in  excess  of  the  scheduled  compensation, 
of  risks  ordinary  and  extraordinary.  On  the  other  hand,  if  the 
employer  is  left  without  defense  respecting  the  question  of  fault, 
he  at  the  same  time  is  assured  that  the  recovery  is  limited,  and 
that  it  goes  directly  to  the  relief  of  the  designated  beneficiary.  And 
just  as  the  employee's  assumption  of  ordinary  risks  at  common  law 
presumably  was  taken  into  account  in  fixing  the  rate  of  wages,  so 
the  fixed  responsibility  of  the  employer,  and  the  modified  assumption 
of  risk  by  the  employee  under  the  new  system,  presumably  will  be 
reflected  in  the  wage  scale.  The  act  evidently  is  intended  as  a  just 
settlement  of  a  difficult  problem,  affecting  one  of  the  most  important 
of  social  relations,  and  it  is  to  be  judged  in  its  entirety.  We  have 
said  enough  to  demonstrate  that,  in  such  an  adjustment,  the  particular 
rules  of  the  common  law  affecting  the  subject-matter  are  not  placed 
by  the  Fourteenth  Amendment  beyond  the  reach  of  the  law-making 
power  of  the  state;  and  thus  we  are  brought  to  the  question  whether 
the  method  of  compensation  that  is  established  as  a  substitute  tran- 
scends the  limits  of  permissible  state  action. 

We  will  consider,  first,  the  scheme  of  compensation,  deferring  for 
the  present  the  question  of  the  manner  in  which  the  employer  is 
required  to  secure  payment. 

Briefly,  the  statute  imposes  liability  upon  the  employer  to  make 
compensation  for  disability  or  death  of  the  employee  resulting  from 
accidental  personal  injury  arising  out  of  and  in  the  course  of  the 
employment,  without  regard  to  fault  as  a  cause  except  where  the 
injury  or  death  is  occasioned  by  the  employee's  wilful  intention  to 
produce  it,  or  where  the  injury  results  solely  from  his  intoxication 
while  on  duty;  it  graduates  the  compensation  for  disability  according 
to  a  prescribed  scale  based  upon  the  loss  of  earning  power,  having 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  199 

regard  to  the  previous  wage  and  the  character  and  duration  of  the 
disability;  and  measures  the  death  benefits  according  to  the  depend- 
ency of  the  surviving  wife,  husband,  or  infant  children. 

Of  course,  we  cannot  ignore  the  question  whether  the  new  arrange- 
ment is  arbitrary  and  unreasonable,  from  the  standpoint  of  natural 
justice.  Respecting  this,  it  is  important  to  be  observed  that  the  act 
applies  only  to  disabling  or  fatal  personal  injuries  received  in  the 
course  of  hazardous  employment  in  gainful  occupation.  Reduced  to 
its  elements,  the  situation  to  be  dealt  with  is  this:  Employer  and 
employee,  by  mutual  consent,  engage  in  a  common  operation  intended 
to  be  advantageous  to  both ;  the  employee  is  to  contribute  his  personal 
services,  and  for  these  is  to  receive  wages,  and  ordinarily  nothing 
more;  the  employer  is  to  furnish  plant,  facilities,  organization, 
capital,  credit,  is  to  control  and  manage  the  operation,  paying  the 
wages  and  other  expenses,  disposing  of  the  product  at  such  prices  as 
he  can  obtain,  taking  all  the  profits,  if  any  there  be,  and  of  necessity 
bearing  the  entire  losses.  In  the  nature  of  things,  there  is  more  or 
less  of  a  probability  that  the  employee  may  lose  his  life  through  some 
accidental  injury  arising  out  of  the  employment,  leaving  his  widow 
or  children  deprived  of  their  natural  support;  or  that  he  may  sustain 
an  injury  not  mortal  but  resulting  in  his  total  or  partial  disablement, 
temporary  or  permanent,  with  corresponding  impairment  of  earning 
capacity.  The  physical  suffering  must  be  borne  by  the  employee 
alone;  the  laws  of  nature  prevent  this  from  being  evaded  or  shifted 
to  another,  and  the  statute  makes  no  attempt  to  afford  an  equivalent 
in  compensation.  But,  besides,  there  is  the  loss  of  earning  power; 
a  loss  of  that  which  stands  to  the  employee  as  his  capital  in  trade. 
This  is  a  loss  arising  out  of  the  business,  and,  however  it  may  be 
charged  up,  is  an  expense  of  the  operation,  as  truly  as  the  cost  of 
repairing  broken  machinery  or  any  other  expense  that  ordinarily  is 
paid  by  the  employer.  Who  is  to  bear  the  charge  ?  It  is  plain  that, 
on  grounds  of  natural  justice,  it  is  not  unreasonable  for  the  state,  while 
relieving  the  employer  from  responsibility  for  damages  measured  by 
common-law  standards  and  payable  in  cases  where  he  or  those  for* 
whose  conduct  he  is  answerable  are  found  to  be  at  fault,  to  require 
him  to  contribute  a  reasonable  amount,  and  according  to  a  reasonable 
and  definite  scale,  by  way  of  compensation  for  the  loss  of  earning 
power  incurred  in  the  common  enterprise,  irrespective  of  the  question 
of  negligence,  instead  of  leaving  the  entire  loss  to  rest  where  it  may 
chance  to  fall — that  is,  upon  the  injured  employee  or  his  dependents. 


200  LAW  AND  BUSINESS 

Nor  can  it  be  deemed  arbitrary  and  unreasonable,  from  the  standpoint 
of  the  employee's  interest,  to  supplant  a  system  under  which  he 
assumed  the  entire  risk  of  injury  in  ordinary  cases,  and  in  others  had 
a  right  to  recover  an  amount  more  or  less  speculative  upon  proving 
facts  of  negligence  that  often  were  difficult  to  prove,  and  substitute  a 
system  under  which  in  all  ordinary  cases  of  accidental  injury  he  is 
sure  of  a  definite  and  easily  ascertained  compensation,  not  being 
obliged  to  assume  the  entire  loss  in  any  case  but  in  all  cases  assuming 
any  loss  beyond  the  prescribed  scale. 

Much  emphasis  is  laid  upon  the  criticism  that  the  act  creates 
liability  without  fault.  This  is  sufficiently  answered  by  what  has 
been  said,  but  we  may  add  that  liability  of  the  carrier,  of  the  inn- 
keeper, of  him  who  employed  fire  or  other  dangerous  agency  or 
harbored  a  mischievous  animal,  was  not  dependent  altogether  upon 
questions  of  fault  or  negligence.  Statutes  imposing  liability  without 
fault  have  been  sustained.  St.  Louis  6°  San  Francisco  Railway  Co.  v. 
Mathews,  165  U.S.  i,  22;  Chicago,  Rock  Island  &  Pacific  Railway  Co. 
v.  Zernecke,  183  U.S.  582,  586. 

We  have  referred  to  the  maxim,  respondeat  superior.  In  a  well- 
known  English  case,  Hall  v.  Smith,  2  Bing.  156,  160,  this  maxim  was 
said  by  BEST,  C.  J.,  to  be  "bottomed  on  this  principle,  that  he  who 
expects  to  derive  advantage  from  an  act  which  is  done  by  another 
for  him,  must  answer  for  any  injury  which  a  third  person  may  sustain 
from  it."  And  this  view  has  been  adopted  in  New  York.  Cardot  v. 
Barney,  63  N.Y.  281,  287.  The  provision  for  compulsory  compensa- 
tion, in  the  act  under  consideration,  cannot  be  deemed  to  be  an  arbi- 
trary and  unreasonable  application  of  the  principle,  so  as  to  amount 
to  a  deprivation  of  the  employer's  property  without  due  process  of 
law.  The  pecuniary  loss  resulting  from  the  employee's  death  or 
disablement  must  fall  somewhere.  It  results  from  something  done 
in  the  course  of  an  operation  from  which  the  employer  expects  to 
derive  a  profit.  In  excluding  the  question  of  fault  as  a  cause  of  the 
injury,  the  act  in  effect  disregards  the  proximate  cause  and  looks  to 
one  more  remote— the  primary  cause,  as  it  may  be  deemed — and 
that  is,  the  employment  itself.  For  this,  both  parties  are  responsible, 
since  they  voluntarily  engage  in  it  as  coad venturers,  with  personal 
injury  to  the  employee  as  a  probable  and  foreseen  result.  In  ignoring 
any  possible  negligence  of  the  employee  producing  or  contributing  to 
the  injury,  the  lawmaker  reasonably  may  have  been  influenced  by 
the  belief  that  in  modern  industry  the  utmost  diligence  in  the 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  201 

employer's  service  is  in  some  degree  inconsistent  with  adequate 
care  on  the  part  of  the  employee  for  his  own  safety;  that  the  more 
intently  he  devotes  himself  to  the  work,  the  less  he  can  take  precau- 
tions for  his  own  security.  And  it  is  evident  that  the  consequences 
of  a  disabling  or  fatal  injury  are  precisely  the  same  to  the  parties 
immediately  affected,  and  to  the  community,  whether  the  proximate 
cause  be  culpable  or  innocent.  Viewing  the  entire  matter,  it  cannot 
be  pronounced  arbitrary  and  unreasonable  for  the  state  to  impose 
upon  the  employer  the  absolute  duty  of  making  a  moderate  and 
definite  compensation  in  money  to  every  disabled  employee,  or  in 
case  of  his  death  to  those  who  were  entitled  to  look  to  him  for  support 
in  lieu  of  the  common-law  liability  confined  to  cases  of  negligence. 

This,  of  course,  is  not  to  say  that  any  scale  of  compensation,  how- 
ever insignificant  on  the  one  hand  or  onerous  on  the  other,  would  be 
supportable.  In  this  case,  no  criticism  is  made  on  the  ground  that 
the  compensation  prescribed  by  the  statute  in  question  is  unreason- 
able in  amount,  either  in  general  or  in  the  particular  case.  Any 
question  of  that  kind  may  be  met  when  it  arises. 

But,  it  is  said,  the  statute  strikes  at  the  fundamentals  of  con- 
stitutional freedom  of  contract;  and  we  are  referred  to  two  recent 
declarations  by  this  court.  The  first  is  this:  "Included  in  the  right 
of  personal  liberty  and  the  right  of  private  property — partaking  of 
the  nature  of  each — is  the  right  to  make  contracts  for  the  acquisition 
of  property.  Chief  among  such  contracts  is  that  of  personal  employ- 
ment by  which  labor  and  other  services  are  exchanged  for  money  or 
other  forms  of  property.  If  this  right  be  struck  down  or  arbitrarily 
interfered  with,  there  is  a  substantial  impairment  of  liberty  in  the 
long-established  constitutional  sense."  Coppage  v.  Kansas,  236  U.S. 
i,  14.  And  this  is  the  other:  "It  requires  no  argument  to  show  that 
the  right  to  work  for  a  living  in  the  common  occupations  of  the  com- 
munity is  of  the  very  essence  of  the  personal  freedom  and  opportunity 
that  it  was  the  purpose  of  the  (Fourteenth)  Amendment  to  secure." 
Truax  v.  Raich,  239  U.S.  33,  41. 

It  is  not  our  purpose  to  qualify  or  weaken  either  of  these  declara- 
tions in  the  least.  And  we  recognize  that  the  legislation  under  review 
does  measurably  limit  the  freedom  of  employer  and  employee  to 
agree  respecting  the  terms  of  employment,  and  that  it  cannot  be 
supported  except  on  the  ground  that  it  is  a  reasonable  exercise  of  the 
police  power  of  the  state.  In  our  opinion  it  is  fairly  supportable  upon 
that  ground.  And  for  this  reason:  The  subject-matter  in  respect  of 


202  LAW  AND  BUSINESS 

which  freedom  of  contract  is  restricted  is  the  matter  of  compensation 
for  human  life  or  limb  lost  or  disability  incurred  in  the  course  of 
hazardous  employment,  and  the  public  has  a  direct  interest  in  this 
as  affecting  the  common  welfare.  "  The  whole  is  no  greater  than  the 
sum  of  all  its  parts  and  when  the  individual  health,  safety,  and  welfare 
are  sacrificed  or  neglected,  the  state  must  suffer."  H olden  v.  Hardy, 
169  U.S.  366,  397.  It  cannot  be  doubted  that  the  state  may  prohibit 
and  punish  self-maiming  and  attempts  at  suicide;  it  may  prohibit  a 
man  from  bartering  away  his  life  or  his  personal  security;  indeed, 
the  right  to  these  is  often  declared,  in  bills  of  rights,  to  be  "natural 
and  inalienable";  and  the  authority  to  prohibit  contracts  made  in 
derogation  of  a  lawfully  established  policy  of  the  state  respecting 
compensation  for  accidental  death  or  disabling  personal  injury  is 
equally  clear.  Chicago,  Burlington  &  Quincy  Railroad  Co.,  v. 
McGuire,  219  U.S.  549,  571;  Second  Employers'  Liability  Cases, 
223,  U.S.  i,  52. 

We  have  not  overlooked  the  criticism  that  the  act  imposes  no 
rule  of  conduct  upon  the  employer  with  respect  to  the  conditions  of 
labor  in  the  various  industries  embraced  within  its  terms,  prescribes 
no  duty  with  regard  to  where  the  workmen  shall  work,  the  character 
of  the  machinery,  tools,  or  appliances,  the  rules  or  regulations  to  be 
established,  or  the  safety  devices  to  be  maintained.  This  statute  does 
not  concern  itself  with  measures  of  prevention,  which  presumably 
are  embraced  in  other  laws.  But  the  interest  of  the  public  is  not 
confined  to  these.  One  of  the  grounds  of  its  concern  with  the  con- 
tinued life  and  earning  power  of  the  individual  is  its  interest  in  the 
prevention  of  pauperism,  with  its  concomitants  of  vice  and  crime. 
And  in  our  opinion,  laws  regulating  the  responsibility  of  employers 
for  the  injury  or  death  of  employees  arising  out  of  the  employment 
bear  so  close  a  relation  to  the  protection  of  the  lives  and  safety  of 
those  concerned  that  they  properly  may  be  regarded  as  coming  within 
the  category  of  police  regulations.  Sherlock  v.  Ailing,  93  U.S.  99, 
103;  Missouri  Pacific  Railway  Co.  v.  Castle,  224  U.S.  541,  545. 

The  objection  under  the  " equal  protection"  clause  is  not  pressed. 
The  only  apparent  basis  for  it  is  in  exclusion  of  farm  laborers  and 
domestic  servants  from  the  scheme.  But  manifestly,  this  cannot  be 
judicially  declared  to  be  an  arbitrary  classification,  since  it  reasonably 
may  be  considered  that  the  risks  inherent  in  these  occupations  are 
exceptionally  patent,  simple,  and  familiar.  Missouri,  Kansas  6* 
Texas  Railway  Co.  v.  Cade,  233  U.S.  642,  650,  and  cases  there  cited. 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  203 

We  conclude  that  the  prescribed  scheme  of  compulsory  compensa- 
tion is  not  repugnant  to  the  provisions  of  the  Fourteenth  Amend- 
ment, and  are  brought  to  consider,  next,  the  manner  in  which  the 
employer  is  required  to  secure  payment  of  the  compensation.  _By_ 
section  50,  this  may  be  done  in  one  of  three  ways :  (a)  state  insurance, 
(b)  insurance  with  an  authorized  insurance  corporation  or  association, 
or  (c)  by  a  deposit  of  securities.  The  record  shows  that  the  prede- 
cessor of  plaintiff  in  error  chose  the  third  method,  and,  with  the  sanc- 
tion of  the  commission,  deposited  securities  to  the  amount  of  $300,000, 
under  section  50,  and  $30,000  in  cash  as  a  deposit  to  secure  prompt 
and  convenient  payment,  under  section  25,  with  an  agreement  to 
make  further  deposit  if  required.  This  was  accompanied  with  a 
reservation  of  all  contentions  as  to  the  invalidity  of  the  act,  and  had 
not  the  effect  of  preventing  plaintiff  in  error  from  raising  the  questions 
we  have  discussed. 

The  system  of  compulsory  compensation  having  been  found  to  be 
within  the  power  of  the  state,  it  is  within  the  limits  of  permissible 
regulation,  in  aid  of  the  system,  to  require  the  employer  to  furnish 
satisfactory  proof  of  his  financial  ability  to  pay  the  compensation,  and 
to  deposit  a  reasonable  amount  of  securities  for  that  purpose.  The 
third  clause  of  section  50  has  not  been,  and  presumably  will  not  be, 
construed  so  as  to  give  an  unbridled  discretion  to  the  commission; 
nor  is  it  to  be  presumed  that  solvent  employers  will  be  prevented  from 
becoming  self-insurers  on  reasonable  terms.  No  question  is  made  but 
that  the  terms  imposed  upon  this  railroad  company  were  reasonable 
in  view  of  the  magnitude  of  its  operations,  the  number  of  its  employees, 
and  the  amount  of  its  pay-roll  (about  $50,000,000  annually);  hence 
no  cricitism  of  the  practical  effect  of  the  third  clause  is  suggested. 

This  being  so,  it  is  obvious  that  this  case  presents  no  question  as 
to  whether  the  state  might,  consistently  with  the  Fourteenth  Amend- 
ment, compel  employers  to  effect  insurance  according  to  either  of  the 
plans  mentioned  in  the  first  and  second  clauses.  There  is  no  such 
compulsion,  since  self-insurance  under  the  third  clause  presumably  is 
open  to  all  employers  on  reasonable  terms  such  as  it  is  within  the  power 
of  the  state  to  impose.  Regarded  as  optional  arrangements,  for 
acceptance  or  rejection  by  employers  unwilling  to  comply  with  that 
clause,  the  plans  of  insurance  are  unexceptionable  from  the  constitu- 
tional standpoint.  Manifestly,  the  employee  is  not  injuriously 
affected  in  a  constitutional  sense  by  the  provisions  giving  to  the 
employer  an  option  to  secure  payment  of  the  compensation  in  either 


204  LAW  AND  BUSINESS 

of  the  modes  prescribed,  for  there  is  no  presumption  that  either  will 
prove  inadequate  to  safeguard  the  employee's  interests. 

Judgment  affirmed. 
QUESTIONS 

1.  What  were  the  inadequacies  of  the  common  law  which  made  necessary 
the  enactment  of  workmen's  compensation  laws  ? 

2.  Trace  the  steps  by  which  an  injured  employee  secures  compensation 
under  a  compensation  act.     Compare  this  procedure  with  the  procedure 
by  which  an  injured  employee  secured  damages  under  the  common  law. 

3.  What  in  general  is  the  basis  of  compensation  under  the  compensation 
laws  ?    Compare  this  with  the  basis  of  compensation  under  the  common 
law. 

4.  The  New  York  act  provides  that  an  employer  must  in  one  of  several 
ways  provide  security  for  the  payment  compensation.    What  is  the 
purpose  of  this  provision  ?    What  security  did  an  injured  employee  have 
under  the  common  law  ? 

5.  It  was  contended  that  the  law  under  consideration  in  the  principal  case 
is  unconstitutional  in  that  it  imposes  liability  upon  an  employer  when 
he  is  not  at  fault,  thus  depriving  him  of  due  process  of  law.    How  was 
this  contention  met  ? 

6.  It  was  contended  that  the  law  is  unconstitutional  because  it  interferes 
with  freedom  of  contract.    How  was  this  contention  met  ? 

7.  It  was  contended  that  the  law  is  unconstitutional  because  it  denies  to 
the  defendant  the  equal  protection  of  the  law.    What  was  the  basis  of 
this  contention  ?    How  was  the  contention  met  ? 

8.  What  is  the  difference  between  an  elective  compensation  law  and  a 
compulsory  compensation  law  ? 

9.  Examine  the  statutes  of  some  state  in  which  you  are  interested  and  make 
a  digest  of  the  workmen's  compensation  act,  if  the  state  in  question  has 
such  an  act,  covering  the  following  points:    (a)  whether  optional  or 
compulsory;   (ft)  employments  covered;   (c)  basis  of  compensation;   (d) 
compensation  for  death,  for  total  disability,  and  for  partial  disability; 
(e)  the  period  which  the  employee  must  wait  for  compensation;    (/) 
whether  an  employer  must  furnish  security  for  payment  of  compensa- 
tion;  (g)  how  the  law  is  administered. 

li.      COMPENSABLE   INJURIES 

YATES  v.  SOUTH  KIRBY  COLLIERIES 

Law  Reports  2  King's  Bench  Division  538  (1910) 

In  October,  1909,  the  applicant — a  collier,  forty-six  years  of  age, 
who  had  been  engaged  in  coal  mining  all  his  life,  and  for  twenty- 
seven  years  had  been  working  at  the  face  of  the  coal  in  the  pit  belong- 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  205 

ing  to  the  respondents — while  working  as  usual,  heard  a  shout  for 
help  from  the  next  working-place.  He  ran  round  his  loose  end  at 
once  and  found  a  fellow-collier  lying  full  length  on  the  ground,  having 
been  knocked  down  by  a  fallen  timber  prop  and  some  coal;  he  was 
bleeding  all  over  his  head  and  from  his  ears  and  eyes.  The  applicant 
picked  him  up  in  his  arms  and,  with  assistance,  carried  him  away; 
he  was  not  dead  at  the  time,  but  died  in  a  quarter  of  an  hour.  The 
effect  on  the  applicant  was  such  that  he  sustained  a  nervous  shock, 
which  incapacitated  him  from  working  at  the  coal  face. 

Proceedings  for  compensation  having  been  taken,  the  county  court 
judge  found  as  a  fact  that  there  was  genuine  incapacity  to  work  which 
was  due  to  the  nervous  shock  which  he  sustained  in  October,  1909, 
when  it  clearly  was  his  duty  to  his  employers  to  go  to  the  assistance 
of  the  injured  collier  who  shouted  for  help  from  the  next  working- 
place,  and  that  his  doing  so  arose  both  "in  the  course  of"  and  "out 
of  "  his  employment.  The  learned  county  judge  accordingly  awarded 
the  applicant  compensation  at  igs.  to  the  date  of  the  award,  and 
IQS.  a  week  till  further  order. 

The  respondents  appealed. 

FARWELL,  L.  J.  It  is  rightly  conceded  that  it  was  part  of  the 
man's  duty  to  go  to  the  assistance  of  his  fellow-workman.  There- 
fore, there  is  no  question  that  the  events  arose  "out  of  and  in  the  course 
of  the  employment."  The  learned  county  court  judge  has  found  as 
a  fact  that  there  was  a  genuine  incapacity  to  work,  which  was  due  to 
the  nervous  shock  which  the  applicant  sustained  in  October  last. 
In  my  opinion  nervous  shock  due  to  accident  which  causes  personal 
incapacity  to  work  is  as  much  "personal  injury  by  accident"  as  a 
broken  leg,  for  the  reasons  already  expressed  by  this  court  in  the  case 
of  Eaves  v.  Blaenclydach  Colliery  Co.  (1909),  2  K.B.  73.  In  truth  I 
find  it  difficult,  when  medical  evidence  is  that  as  a  fact  a  workman  is 
suffering  from  a  known  complaint  arising  from  nervous  shock,  to 
draw  any  distinction  between  that  case  and  the  case  of  a  broken 
limb.  I  see  no  distinction  for  this  purpose  between  the  case  of  the 
guard  who  is  not  in  fact  physically  injured  by  an  accident  to  his 
train,  but  who,  after  assisting  to  carry  away  the  wounded  and  dead, 
breaks  down  from  nervous  shock,  and  the  case  of  the  guard  who  in 
similar  circumstances  stumbles  over  some  of  the  debris  and  breaks 
his  leg.  The  difficulty  is  to  prove  the  fact  so  as  to  avoid  the  risk  of 
malingering,  but  when  the  facts  have  been  proved,  the  injury  causing 
incapacity  to  work  arises  from  the  accident  in  the  one  case  as  in  the 


206  LAW  AND  BUSINESS 

other.    I  am,  therefore,  of  opinion  that  the  judgment  of  the  learned 
county  court  judge  must  be  affirmed. 

QUESTIONS 

1.  Would  the  master  have  been  liable  under  the  common  law  for  the  injury 
which  the  servant  suffered  in  this  case  ? 

2.  What  is  the  danger  involved  in  granting  compensation  in  cases  like  the 
principal  case  ? 

3.  P,  while  working  near  an  open  hatchway,  was  seized  with  a  fit  and  fell 
through  the  hatchway.    Is  this  an  accident  ? 

4.  P,  a  fireman,  working  in  a  stokehole,  drank  water  excessively,  causing 
a  hemorrhage.    Is  this  an  accident  ? 

5.  P,  while  engaged  in  D's  employment,  sustained  a  serious  personal 
injury.    P  makes  a  claim  for  compensation.    D  sets  up  the  following 
defenses:    (a)  that  P  assumed  this  particular  risk;    (6)  that  the  injury 
was  due  to  the  negligence  of  a  fellow-servant;   (c)  that  the  injury  was 
the  result  of  P's  own  negligence.    What  decision  ? 

6.  P  is  injured  through  his  own  wilful  misconduct.    Is  this  an  accident 
within  the  meaning  of  compensation  laws  ? 

CLOVER,  CLAYTON  &  COMPANY  v.  HUGHES 
L.R.  1910  Appeal  Cases  242 

LORD  LOREBURN,  L.C.  My  Lords,  in  this  case  a  workman,  suffer- 
ing from  an  aneurism  in  so  advanced  a  state  of  disease  that  it  might 
have  burst  at  any  time,  was  tightening  a  nut  with  a  spanner,  when 
the  strain,  quite  ordinary  in  this  quite  ordinary  work,  ruptured  the 
aneurism  and  he  died.  This  is  a  mere  summary  of  the  facts.  They 
and  the  learned  county  court  judge's  conclusions  from  them  are  stated 
fully  in  his  instructive  judgment.  In  what  I  have  to  say  I  take  the 
facts  as  he  found  them  in  extenso  and  rely  upon  them. 

He  has  held,  and  the  Court  of  Appeals  have  confirmed  his  decision, 
that  in  these  circumstances  the  workman's  dependents  are  entitled  to 
compensation.  I  agree. 

What,  then,  is  an  "accident"  ?  It  has  been  defined  in  this  House 
as  "an  unlocked  for  mishap  or  an  untoward  event,  which  is  not 
expected  or  designed."  All  the  Lords  who  took  part  in  the  decision 
of  Fenton  v.  Thorley  (1903),  A.C.  443,  agreed  in  substance  with  this 
definition  in  LORD  MACNAGHTEN'S  speech.  I  take  that  as  conclusive. 

This  man  died  from  the  rupture  of  an  aneurism,  and  "  the  death 
was  caused  by  a  strain  arising  out  of  the  ordinary  work  of  the  deceased 
operating  upon  a  condition  of  body  which  was  such  as  to  render  strain 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  207 

fatal."  Again,  "the  aneurism  was  in  such  an  advanced  condition 
that  it  might  have  burst  while  the  man  was  asleep,  and  very  slight 
exertion, or  strain  would  have  been  sufficient  to  bring  about  a  rupture." 
These  are  the  findings  and  they  bind  us. 

The  first  question  here  is  whether  or  not  the  learned  judge  was 
entitled  to  regard  the  rupture  as  an  "accident"  within  the  meaning 
of  this  Act.  In  my  opinion  he  was  so  entitled.  Certainly  it  was  an 
"untoward  event."  It  was  not  designed.  It  was  unexpected  in 
what  seems  to  me  the  relevant  sense,  namely,  that  a  sensible  man 
who  knew  the  nature  of  the  work  would  not  have  expected  it.  I 
cannot  agree  with  the  argument  presented  to  your  Lordships  that 
you  are  to  ask  whether  a  doctor  acquainted  with  the  man's  condition 
would  have  expected  it.  Were  that  the  right  view,  then  it  would 
not  be  an  accident  if  a  man  very  liable  to  fainting  fits  fell  in  a  faint 
from  a  ladder  and  hurt  himself.  No  doubt  the  ordinary  accident  is 
associated  with  something  external,  the  bursting  of  a  boiler,  or  an 
explosion  in  a  mine,  for  example.  But  it  may  be  merely  from  the 
man's  own  miscalculation,  such  as  tripping  and  falling.  Or  it  may  be 
due  both  to  internal  and  external  conditions,  as  if  a  seaman  were 
to  faint  in  the  rigging  and  tumble  into  the  sea.  I  think  it  may  also 
be  something  going  wrong  with  the  human  frame  itself,  such  as  the 
straining  of  a  muscle  or  the  breaking  of  a  blood  vessel.  If  that 
occurred  when  he  was  lifting  a  weight  it  would  be  properly  described 
as  an  accident.  So,  I  think,  rupturing  an  aneurism  when  tightening 
a  nut  with  a  spanner  may  be  regarded  as  an  accident.  It  cannot  be 
disputed  that  the  fatal  injury  was  in  this  case  due  to  this  accident, 
the  rupture  of  the  aneurism  under  the  strain. 

QUESTIONS 

1.  What  was  the  test  of  an  employer's  liability  for  injuries  to  his  employees 
under  the  common  law  ? 

2.  Compensation  laws  typically  provide  that '  employers  shall  compensate 
their  employees  for  "personal  injuries  by  accidents  arising  out  of  and 
in  the  course  of  employment."    What  is  the  theory  underlying  this 
liability?    What  is  the  justification  for  imposing  this   character  of 
liability  on  an  employer  ? 

3.  What  test  does  this  court  announce  for  determining  whether  a  given 
injury  is  an  "accident"  within  the  meaning  of  the  compensation  laws? 

4.  Can  it  really  be  said  that  the  death  in  the  principal  case  was  the  result 
of  an  accident?    Was  the  death  not  rather  the  result  of  the  natural 
disintegration  of  the  human  system  ? 


208  LAW  AND  BUSINESS 

NISBET  v.  RAYNE  &  BURN 

Law  Reports  2  King's  Bench  Division  689  (1910) 
FAR  WELL,  L.  J.  The  deceased  man  was  a  cashier  in  the  employ- 
ment of  the  appellants,  who  are  colliery  owners,  and  it  was  part  of 
his  duty  to  take  the  money  necessary  to  pay  the  men's  wages  on  the 
regular  paydays  to  the  colliery,  and  for  this  purpose  to  travel  by  rail 
to  the  colliery;  and  while  he  was  thus  engaged  on  March  18,  1910, 
he  was  robbed  and  murdered  in  the  train.  The  question  is  whether 
he  met  his  death  by  accident  arising  out  of  and  in  the  course  of  his 
employment. 

It  is  argued,  first,  that  there  was  no  "accident"  at  all,  because 
death  resulted  from  the  intentional  act  of  the  murderer,  and  intention 
excludes  any  idea  of  accident.  But  the  intention  of  the  murderer  is 
immaterial;  so  far  as  any  intention  on  the  part  of  the  victim  is  con- 
cerned, his  death  was  accidental;  and  although  it  is  true  that 
one  would  not  in  ordinary  parlance  say,  for  example,  that  Desdemona 
died  by  accident,  this  is  because  the  horror  of  the  crime  dominates 
the  imagination  and  compels  the  expression  of  the  situation  in  terms 
relating  to  the  crime  and  the  criminal  alone;  and  it  would  be  quite 
natural  to  say  that  a  man  who  died  from  the  bite  of  a  dog  or  the 
derailment  of  a  train  caused  by  malicious  persons  putting  an  obstacle 
on  the  line  died  by  accident.  But  the  point  is  covered  by  the  decision 
in  Challis  v.  London  &  South  Western  Railway  Co.  (1905),  2  K.B.  154, 
at  page  156,  where  LORD  COLLINS,  then  Master  of  the  Rolls,  says: 
"He" — that  is,  the  county  judge — "appears  to  me  to  have  decided 
that,  as  the  stone  was  wilfully  dropped,  it  was  an  intentional  act, 
and,  therefore,  there  could  not  be  said  to  have  been  an  accident.  I 
think  that  the  judge  was  wrong  in  so  holding.  I  do  not  think  that 
there  was  anything  in  the  fact  that  the  stone  was  wilfully  dropped 
to  prevent  what  happened  from  being  an  accident  from  the  stand- 
point of  the  person  who  suffered  through  it";  and  by  the  Irish  case 
of  Anderson  v.  Balfour  (1910),  2  I.R.  497. 

QUESTIONS 

1.  What  test  does  the  court  in  this  case  announce  for  determining  what  is 
an  accident  ? 

2.  How  can  an  intentional  wrong  inflicted  by  a  third  person  be  properly 
designated  as  an  accident  ? 

3.  X,  a  small  boy,  standing  on  an  overhead  bridge,  mischievously  threw 
a  rock  at  a  passing  train  and  struck  the  engineer  in  the  eye.    Is  this  an 
accident  ? 

4.  P,  nervous  and  depressed  from  overwork  in  his  employment,  commits 
suicide.    Is  this  an  accident  ? 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  209 

BRINTONS  v.  TURVEY 
L.R.  1905  Appeal  Cases  230 

The  respondent's  husband,  while  employed  with  other  workmen 
in  sorting  wool  hi  the  appellant's  factory,  was  infected  with  anthrax 
on  the  second  of  March,  1903,  and  died  thereof  on  the  seventh.  In 
an  arbitration,  after  hearing  medical  evidence,  the  county  judge 
awarded  compensation  to  the  respondent.  This  decision  was  affirmed 
by  the  Court  of  Appeal. 

LORD  MACNAGHTEN.  My  Lords,  on  the  facts  found  by  the 
learned  county  judge  I  am  of  opinion  that  the  decision  of  the  Court 
of  Appeal  was  right.  It  is  plain,  I  think,  that  the  mischief  which 
befell  the  workman  in  the  present  case  was  due  to  accident,  or  rather, 
I  should  say,  to  a  chapter  of  accidents. 

It  was  an  accident  that  the  noxious  thing  that  settled  on  the  man's 
face  happened  to  be  present  in  the  materials  which  he  was  engaged 
in  sorting.  It  was  an  accident  that  this  noxious  thing  escaped  the 
down  draught  or  suck  of  the  fan  which  the  Board  of  Trade,  as  we 
were  told,  requires  to  be  hi  use  while  work  is  going  on  in  such  a  factory 
as  that  where  the  man  was  employed.  It  was  an  accident  that  the 
thing  struck  the  man  on  a  delicate  and  tender  spot  in  the  corner 
of  the  eye.  It  was  through  some  accident  that  the  poison  found 
entrance  into  the  man's  system,  for  the  judge  finds  that  there  was  no 
abrasion  about  the  eye,  while  the  medical  evidence  seems  to  be  that 
without  some  abrasion  infection  is  hardly  possible.  The  result  was 
anthrax,  and  the  end  came  speedily. 

Speaking  for  myself,  I  cannot  doubt  that  the  man's  death  was 
attributable  to  personal  injury  by  accident  arising  out  of,  and  in  the 
course  of,  his  employment.  The  accidental  character  of  the  injury 
is  not,  I  think,  removed  or  displaced  by  the  fact  that,  like  many  other 
accidental  injuries,  it  set  up  a  well-known  disease,  which  was  immedi- 
ately the  cause  of  death,  and  would  no  doubt  be  certified  as  such  in 
the  usual  death  certificate. 

LORD  LINDLEY.  My  Lords,  I  hope  that  the  decision  in  this  case 
will  not  be  regarded  as  involving  the  doctrine  that  all  diseases  caught 
by  a  workman  in  the  course  of  his  employment  are  to  be  regarded  as 
accidents  within  the  meaning  of  the  Workmen's  Compensation  Act. 
That  is  very  far  from  being  my  view  of  the  Act,  and  I  concur  with 
the  observations  made  by  COZENS-HARDY,  L.  J.,  on  this  point  at 
the  end  of  his  judgment.  In  this  case  your  Lordships  have  to  deal 
with  death  resulting  from  disease  caused  by  an  injury  which  I  am 


210       .  LAW  AND  BUSINESS 

myself  unable  to  describe  more  accurately  than  by  calling  it  purely 
accidental. 

Order  of  Court  of  Appeal  affirmed  and  appeal  dismissed  with 
costs. 

QUESTIONS 

1.  Would  the  master  have  been  liable  under  the  common  law  for  the 
injury  which  the  servant  suffered  in  this  case  ?    Why  or  why  not  ? 

2.  P,  while  engaged  in  D's  employment,  contracted  smallpox  from  a  fellow- 
worker.    Is  this  an  accident  ? 

3.  P  contracted  typhoid  fever  as  a  result  of  impure  drinking  water  fur- 
nished by  his  master.    Is  this  an  accident  ? 

4.  P  contracted  rheumatism  due  to  the  dampness  of  the  place  in  which  he 
worked.    Is  this  an  accident  ? 

5.  P,  in  the  line  of  his  work,  sustained  a  broken  rib.    Due  to  his  weakened 
condition,  he  became  inflicted  with  tuberculosis.    Is  this  an  accident  ? 

TERLECKI  v.  STRAUSS 
85  New  Jersey  Law  Reports  454  (1914) 

Petition  under  Workmen's  Compensation  Act.  Petitioner  quit 
work  at  her  machine  shortly  before  noon,  and  was  preparing  to  go 
home.  She  was  combing  particles  of  wool  out  of  her  hair,  as  was 
the  custom  of  the  girl  employees.  For  this  purpose  she  went  to  a 
passageway  where  a  piece  of  looking  glass  had  been  placed  against  a 
post,  thirty-two  feet  from  her  machine.  It  was  a  common  practice 
of  the  girls,  to  the  knowledge  of  the  superintendent  and  overseer,  to 
do  as  the  petitioner  did,  and  it  was  not  forbidden.  There  was  a 
"sink"  room  but  no  dressing-room  on  that  floor  of  the  factory. 
While  the  petitioner  was  combing  her  hair  it  was  caught  in  the  still 
moving  machinery  and  she  suffered  serious  damage. 

SWAYZE,  J.  We  have  no  doubt  that  the  accident  happened  in 
the  course  of  employment.  It  would  be  entirely  too  narrow  a  con- 
struction to  limit  the  benefit  of  the  statute  to  the  time  the  workman 
is  actually  employed  at  his  machine.  He  must  have  time  to  reach 
his  machine  and  to  get  away  from  his  employer's  premises.  In  fact, 
it  is  a  necessary  implication  of  the  contract  of  employment  that  the 
workman  shall  come  to  his  work  and  shall  leave  with  reasonable  speed 
when  the  work  is  over.  The  preparation  reasonably  necessary  for 
beginning  work  after  the  employer's  premises  are  reached,  and  for 
leaving  when  the  work  is  over,  is  a  part  of  the  employment.  A  work- 
man is  none  the  less  in  the  course  of  employment  because  he  is  engaged 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  21 1 

in  changing  his  working  clothes  for  his  street  clothes.  In  the  present 
case,  it  was  reasonably  necessary  that  the  petitioner  should  comb  her 
hair  and  remove  the  particles  before  leaving  the  factory. 

The  judgment  is  affirmed. 
QUESTIONS 

1.  P,  passing  through  a  crowded  street  on  his  way  home  from  work,  is 
struck  by  an  automobile.    He  claims  compensation.     What  decision? 

2.  P  works  in  D's  factory.    While  proceeding  across  D's  factory  premises 
on  his  way  to  work  he  is  struck  by  an  automobile.     Is  he  entitled  to 
compensation  ? 

3.  P,  for  his  own  convenience,  is  riding  home  in  a  truck  of  his  employer. 
He  is  injured  in  a  street  collision.     Is  he  entitled  to  compensation? 

4.  D,  owner  and  operator  of  a  mine,  transports  his  employees  to  and  from 
the  mines,  a  distance  of  six  miles,  in  trucks.    P,  one  of  D's  employ ees} 
is  injured  in  a  wreck  while  being  thus  carried  home.    Is  P  entitled  to 
compensation  ? 

5.  P,  a  gas  inspector,  while  making  his  itinerancy,  is  injured  in  a  street- 
car wreck.    Is  he  entitled  to  compensation  ? 

6.  P,  a  servant,  living  on  the  premises  of  her  employer,  is  suffocated  by 
gas  while  sleeping  in  her  room.     Is  she  entitled  to  compensation  ? 

7.  P,  while  eating  his  lunch  on  the  premises  of  his  employer,  is  injured  by 
an  explosion  of  a  boiler.     Is  he  entitled  to  compensation  ? 

WHITEHEAD  v.  READER 
Law  Reports  2  King's  Bench  Division  48  (1901) 

The  applicant  was  a  carpenter,  and  a  part  of  his  duty  was  to 
sharpen  his  tools  at  a  grindstone  rotated  by  machinery.  He  had 
been  forbidden  to  touch  the  machinery,  but  the  band  that  rotated 
the  grindstone  came  off,  and  he  endeavored  to  replace  it.  In  doing 
so  he  sustained  an  injury  to  his  hand  for  which  he  sought  to  obtain 
compensation.  The  county  court  judge  found  that  the  accident  that 
caused  the  injury  arose  out  of  and  in  the  course  of  the  employment 
of  the  workman,  that  he  had  been  forbidden  to  touch  the  machinery, 
but  that  he  had  not  been  guilty  of  serious  and  wilful  misconduct  in 
endeavoring  to  replace  the  band.  An  award  was  made  in  favor  of 
the  applicant,  and  the  employer  appealed. 

COLLINS,  L.  J.  I  agree  in  what  has  already  been  pointed  out,  that 
it  is  not  every  breach  of  a  master's  orders  that  would  have  the  effect 
of  terminating  the  servant's  employment  so  as  to  excuse  the  master 
from  the  consequences  of  the  breach  of  his  orders.  We  have  to  get 
back  to  the  orders  emanating  from  the  master  to  see  what  is  the  sphere 


212  LAW  AND  BUSINESS 

of  employment  of  the  workman,  and  it  must  be  competent  to  the 
master  to  limit  that  sphere.  If  the  servant  acting  within  the  sphere 
of  his  employment  violates  the  order  of  his  master,  the  latter  is 
responsible.  It  is,  however,  obvious  that  a  workman  cannot  travel 
out  of  the  sphere  of  his  employment  without  the  order  of  his  employer 
to  do  so;  and  if  he  does  travel  out  of  the  sphere  of  his  employment 
without  such  an  order,  his  acts  do  not  make  the  master  liable  either 
to  the  workman  under  the  Workmen's  Compensation  Act,  1897, 
or  to  third  persons  at  common  law.  Take  as  an  illustration  the 
case  of  Beard  v.  London  General  Omnibus  Co.  (1900),  2  Q.B.  530,  in 
which  the  conductor  of  an  omnibus  took  upon  himself  to  drive  it 
in  breach" of  his  master's  orders,  because  his  employment  was  limited 
by  the  master  to  acting  as  conductor,  and  it  was  not  shown  that  he 
had  authority  to  drive,  an  employment  for  which  he  might  have  been 
quite  unfitted.  In  the  present  case,  if  the  two  spheres  of  employ- 
ment had  been  distinctly  separated  and  defined — namely,  the  grind- 
ing of  the  tools  and  the  skilled  labor  of  managing  the  machinery — 
and  the  applicant's  employment  had  been  limited  to  the  former,  and 
if,  while  acting,  in  breach  of  the  order  limiting  his  employment,  he 
had  met  with  the  accident,  the  master  would  not  have  been  liable. 
The  county  court  judge  came  to  the  conclusion  that  the  injury  to  the 
workman  arose  from  an  accident  in  the  course  of  the  employment, 
and  he  coupled  that  with  a  finding  as  to  that  which  the  man  did,  not 
being  serious  and  wilful  misconduct,  which  does  not  show  that  the 
workman  had  traveled  out  of  the  sphere  of  his  employment  in  doing 
that  which  resulted  hi  the  injury  to  him.  The  county  court  judge 
has  not  furnished  to  this  court  materials  upon  which  we  can  say  that 
he  was  wrong  in  law,  and  therefore  this  court  is  not  in  a  position  to 
differ  from  the  conclusion  at  which  he  arrived. 

QUESTIONS 

1.  The  injury  complained  of  in  this  case  was  the  direct  result  of  the  servant's 
disobedience.    Why  then  should  he  be  entitled  to  compensation  ? 

2.  P  was  employed  to  oil  certain  machinery  and  was  directed  never  to  oil 
the  machinery  while  in  motion.    He  had  at  times  done  so  when  the 
mill  was  in  motion  and  had  been  warned  not  to  do  so  again.    Later, 
oiling  the  machinery  while  in  motion,  he  was  caught  in  the  machine  and 
his  arm  was  badly  crushed.    Is  he  entitled  to  compensation  ? 

3.  P,  whose  duty  it  was  to  walk  behind  a  lorry,  ready  to  apply  the  brakes 
when  needed,  in  disobedience  of  his  master's  instructions,  rode  upon 
the  lorry  beside  the  driver  and  in  getting  off  to  apply  the  brakes  fell 
and  received  an  injury.    Is  he  entitled  to  compensation  ? 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  213 

4.  P,  while  working  as  a  machinist  in  D's  plant,  went  to  the  assistance  of 
a  fellow-worker  who  had  fallen  into  a  vat  of  boiling  water.     P  stumbled 
and  himself  fell  into  the  water  and  was  so  badly  scalded  that  he  died. 
Are  his  dependents  entitled  to  compensation  ? 

5.  P  and  certain  fellow- workers,  during  their  hours  of  employmentrwere 
scuffling,  in  the  course  of  which  P  was  thrown  against  moving  machinery 
and  seriously  injured.    Is  he  entitled  to  compensation  ? 

GRIFFITH  v.  COLE  BROTHERS 
183  Iowa  Reports  415  (1918) 

SALINGER,  J.  The  defendants  were  bridge  builders,  who  had 
charge  of  construction  of  county  bridges  in  Story  County.  Deceased 
was  employed  by  them.  Decedent  and  others  in  such  employment 
were  ty  defendants  lodged  and  boarded  on  the  ground  where  the  work 
was  done.  On  the  night  of  the  accident,  the  day's  work  had  been 
finished,  but  the  employees  were  in  the  boarding  tent.  They  had 
got  through  washing  the  dishes,  and  were  sitting  there  until  it  was 
time  to  go  to  bed.  While  thus  engaged,  the  decedent  came  to  his 
death  from  a  stroke  of  lightning.  Concede  that  he  was  in  the  course 
of  his  employment  while  thus  in  the  tent  awaiting  bedtime,  or  super- 
vising other  employees  in  getting  ready  for  bed,  and  still  there  must 
be  proof  that  the  injury  arose  out  of  such  employment.  The  burden 
is  on  the  claimant.  It  is  not  discharged  by  creating  an  equipoise. 
It  requires  a  preponderance. 

It  must  appear  by  a  preponderance  that  there  is  some  causative 
connection  between  the  injury  and  something  peculiar  to  the  employ- 
ment (Jones  v.  United  States  Mutual  Accident  Association,  92  Iowa 
652);  that  it  resulted  from  some  risk  reasonably  incident  to  the 
employment,  because  "out  of"  involves  the  idea  that  the  injury  is 
in* some  sense  due  to  the  employment  (Fitzgerald  v.  W.  G.  Clarke  6° 
Son,  2  K.B.  [1908]  796);  a  causative  danger  peculiar  to  the  work,  and 
not  "common  to  the  neighborhood,"  an  injury  fairly  traceable  to  the 
employment  as  a  contributing  cause — to  some  hazard  other  than  one 
to  which  the  workman  would  have  been  equally  exposed  though  in  a 
different  employment  (McNicol's  case,  215  Mass.  497);  a  hazard 
peculiar  to  the  business  which  is  "the  immediate  cause"  of  the  injury 
(Rodger  v.  Paisley  School  Board,  i  Scots  Law  Times  [1912],  271); 
and  injury  due  to  something  more  than  the  normal  risk  to  which  all 
are  subject,  which,  at  least,  means  that  the  employment  necessarily 
accentuates  the  natural  hazard  attendant  upon  work  done  in  the 
course  of  the  employment  (State  v.  District  Court,  129  Minn.  502). 


214  LAW  AND  BUSINESS 

The  most  that  may  be  said  where,  as  here,  an  employee  is  injured 
while  sitting  in  his  boarding  tent,  preparatory  to  going  to  bed,  is 
that,  if  he  had  not  been  employed,  he  would  not  have  been  present 
in  the  tent  and  would  not  have  been  struck  at  the  time  he  was.  In 
the  same  sense,  the  fact  that  he  was  born  establishes  a  causative 
connection.  If  he  had  never  come  into  being,  he  could  not  have 
been  struck  by  lightning.  The  same  argument  might  be  made  for 
a  claim  against  one  who  sold  a  carriage  to  one  who  was  struck 
by  lightning  while  riding  in  it.  What  was  said  in  Craske  v.  Wigan, 
2  B.W.C.C.  35,  covers  the  situation: 

It  is  not  enough  for  the  applicant  to  say  "the  accident  would  not  have 
happened  if  I  had  not  been  engaged  in  this  employment,  or  if  I  had  not 
been  in  that  particular  place."  The  applicant  must  go  further,  and  must 
say,  "The  accident  arose  because  of  something  I  was  doing  in  the  course 
of  my  employment,  and  because  I  was  exposed  by  the  nature  of  my  employ- 
ment to  some  peculiar  danger." 

In  our  opinion,  the  injury  claimed  for  did  not  arise  "out  of" 
decedent's  employment. 

QUESTIONS 

1.  Was  the  claimant  denied  compensation  in  this  case  because  the  injury 
did  not  arise  in  his  employment  or  because  it  did  not  arise  out  of  his 
employment  ? 

2.  In  view  of  the  purpose  of  compensation  legislation,  what  should  be  the 
test  as  to  whether  a  given  injury  arises  out  of  one's  employment  ? 

3.  P,  while  operating  a 'metal  scraper  on  a  highway,  was  struck  by  light- 
ning.   Is  this  a  compensable  injury  ? 

4.  P,  while  working  on  a  scaffold  some  thirty  feet  high,  was  struck  by 
lightning.    Is  this  a  compensable  injury  ? 

5.  P,  while  working  on  a  road,  on  a  hot  summer  day,  suffered  a  sunstroke. 
Is  this  a  compensable  injury  ? 

6.  P,  a  baker's  driver,  while  delivering  bread  on  a  severely  cold  day,  was 
badly  frost-bitten.    Is  this  a  compensable  injury  ? 

7.  P,  a  house  servant,  was  sent  to  post  a  letter.    In  passing  down  the  street, 
she  slipped  on  a  banana  peel  and  sustained  a  serious  injury.    Is  this  a 
compensable  injury  ? 

CHALLIS  v.  LONDON  AND  SOUTHWESTERN  RAILWAY 
Law  Reports  2  King's  Bench  Division  154  (1905) 

COLLINS,  M.  R.  This  is  an  appeal  from  the  ward  of  a  county 
judge  dismissing  a  claim  for  compensation  made  by  the  dependants 
of  a  deceased  engine-driver.  The  circumstances  were  these.  While 
the  deceased  was  driving  a  train  under  a  bridge,  what  is  called  the 
"eye-glass"  of  the  driver's  cab  on  the  engine  appears  to  have  been 
broken  by  a  stone,  which  the  county  judge  finds  to  have  been  de- 


THE  RELATION  OF  EMPLOYER  AND  EMPLOYEE  215 

liberately  thrown  by  a  boy  standing  on  the  bridge.  The  effect  of  the 
breaking  of  the  glass  was  that  the  driver's  face  and  eyes  were  injured. 
It  has  not  been  finally  decided  whether  that  injury  was  ultimately 
the  cause  of  his  death,  because  the  county  judge  held  that  the  injury 
was  not  caused  by  an  accident  arising  out  of  the  deceased's  employ- 
ment, and  therefore  it  was  not  necessary  to  determine  that  question. 

The  contention  was  that  this  occurrence,  though  an  accident,  was 
not  one  which  could  be  said  to  have  arisen  out  of  the  deceased's 
employment.  I  do  not  think  that,  in  deciding  that  question,  we 
should  be  justified  in  leaving  out  of  sight  what  is  matter  of  common 
knowledge  and  experience  in  relation  to  the  subject  with  which  we 
are  dealing;  and  therefore  we  must,  I  think,  approach  the  question 
whether  what  occurred  was  a  risk  incidental  to  the  employment  of 
an  engine-driver  from  the  standpoint  that  a  train  in  motion  has  great 
attractions  for  mischievous  boys  as  an  object  at  which  to  discharge 
missiles. 

It  seems  to  me  that  the  Legislature,  in  framing  the  Workmen's 
Compensation  Act,  1897,  intended  to  provide  for  the  risks  of  accident 
which  are  within  the  ordinary  scope  of  the  particular  employment  in 
which  the  workman  is  engaged.  No  doubt  the  Act  does  not  use  the 
expression  "risks  incidental  to  the  employment";  but  the  interpreta- 
tion of  the  words  "accidents  arising  out  of  and  in  the  course  of  the 
employment"  appears  to  me  necessarily  to  involve  the  consideration 
of  the  question  what  risks  are  commonly  incidental  to  the  particular 
employment  in  question.  The  cases  relied  upon  by  the  respondents 
are  not  hi  my  opinion  inconsistent  with  the  view  that  such  an  accident 
as  occurred  in  the  present  case  is  within  the  Act.  On  the  contrary, 
they  appear  to  me  to  be  rather  in  favor  of  that  view.  Take  the  case 
of  Armitage  v.  Lancashire  &  Yorkshire  Railway  Co.  (1902),  2  K.B. 
178.  It  appears  from  the  judgment  in  that  case  that,  in  dealing  with 
the  question  whether  the  particular  accident  which  had  happened 
arose  out  of  the  employment,  the  test  applied  was  whether  it  was 
within  the  scope  of  the  employment  of  the  workman  to  submit  to  the 
risk  of  such  an  accident;  and  in  that  case  we  held  that,  the  accident 
not  being  one  to  the  risk  of  which  it  was  within  the  scope  of  his  employ- 
ment to  submit,  it  did  not  come  within  the  purview  of  the  Workmen's 
Compensation  Act,  1897.  In  the  case  of  Falconer  v.  London  and 
Glasgoe  Engineering  and  Iron  Shipbuilding  Co.,  3  F.  564,  the  same  test 
seems  to  have  been  applied  by  all  the  judges  of  Session  in  Scotland. 
In  giving  judgment,  the  Lord  Justice-Clerk  said:  "It  was  against 
accidents  incidental  to  the  special  employment  that  the  benefit  o 


2l6  LAW   AND  BUSINESS 

this  statute  was  given."  LORD  TRAYNER  said:  "If  some  servants 
leave  their  work  and  indulge  in  horseplay  to  the  injury  of  a  fellow- 
servant,  that  does  not  infer  liability  on  the  employer.  It  cannot  be 
said  to  be  incidental  to  his  business,  or  one  of  the  hazards  attached 
to  it."  In  the  present  case  such  an  accident  as  happened  does  appear 
to  me  to  be  one  incidental  to  the  employment  and  a  hazard  attached 
to  it.  LORD  MONCRIEFF  held  that  the  particular  accident  in  that 
case  was  one  incidental  to  the  employment,  and  therefore  differed 
from  the  conclusion  arrived  at  by  the  majority;  but  all  the  members 
of  the  Court  appear  to  have  concurred  in  the  view  that  the  object  of 
the  Workmen's  Compensation  Act,  1897,  was  to  provide  for  those 
risks  which  are  incidental  to  the  particular  employment  in  which 
the  workman  is  engaged.  For  these  reasons  I  think  that,  as  a  matter 
of  law,  upon  the  facts  in  this  case  there  was  an  accident  arising  out 
of  the  deceased  workman's  employment;  but,  as  the  county  judge 
has  left  undetermined  the  question  whether  the  death  of  the  workman 
resulted  from  that  accident,  the  case  must  go  back  to  him  in  order 
that  he  may  decide  that  question. 

QUESTIONS 

1.  P  was  employed  by  D,  a  greengrocer,  as  an  errand  boy.    D  was  known 
to  be  subject  to  fits  of  melancholia  and  had  been  in  an  asylum.    One 
day  D  attacked  P  with  a  chopper  and  seriously  injured  him.    Is  this  a 
compensable  injury  ? 

2.  P,  a  cashier  in  the  employ  of  D,  while  carrying  a  large  sum  of  money 
to  D's  mines  with  which  to  pay  employees,  was  shot  and  robbed  by  some 
third  person.    Is  this  a  compensable  injury  ? 

3.  P,  a  potman,  was  cleaning  a  brass  plate  on  the  street  side  of  D's  public 
house  when  he  was  injured  by  a  bomb  from  an  enemy  aircraft.    Is  this 
a  compensable  injury  ? 

4.  P  was  a  strike-breaker  in  D's  employ.    When  leaving  the  plant  at  the 
end  of  the  day,  P  was  assaulted  by  some  striking  employees.    Is  this  a 
compensable  injury  ? 

5.  P,  a  clerk  in  the  employ  of  D,  was  assaulted  by  a  disgruntled  customer. 
Is  this  a  compensable  injury  ? 

6.  A  dispute  arose  between  P  and  X,  fellow- workers  in  the  employ  of  D, 
as  to  the  mode  of  doing  a  certain  piece  of  work.    In  the  course  of  the 
controversy,  X  assaulted  P.    Is  this  a  compensable  injury  ? 

7.  P,  a  bill-collector  in  the  employ  of  D,  was  bitten  by  a  dog  kept  by  a  de- 
linquent debtor  on  whom  P  was  calling.    Is  this  a  compensable  injury  ? 

8.  P,  while  engaged  in  threshing,  was  stung  by  a  wasp,  causing  his  death. 
Is  this  a  compensable  injury  ? 

9.  P,  a  maid,  while  engaged  in  her  work,  was  sewing  at  an  open  window. 
A  cockchafer  flew  into  her  face.     She  threw  up  her  hand  to  protect  her- 
self and  injured  her  eye  with  the  needle.    Is  this  a  compensable  injury  ? 


CHAPTER  III 

COMPETITIVE  LABOR  PRACTICES 

LUMLEY  v.  GYE 

2  Ellis  and  Blackburn's  Reports  216  (1853) 
(Reprinted  Volume  I,  Law  and  Business,  p.  178) 

QUESTIONS 

1 .  What  was  the  issue  under  consideration  in  the  case  of  Lundey  v.  Gye  ? 
How  was  the  issue  decided  ?    What  rule  of  law  can  be  deduced  from  the 
decision  ? 

2.  Does  competition  between  rival  employers  justify  one  in  knowingly 
inducing  a  breach  of  contract  of  employment  by  an  employee  of  the 
other  ? 

3.  D,  by  offers  of  higher  wages,  induces  ten  men,  employed  by  P  under  an 
arrangement  terminable  at  the  will  of  either  party,  to  leave  P  and  accept 
employment  with  him.    To  what  relief,  if  any,  is  P  entitled  ? 

4.  In  the  foregoing  case  D  induces  the  men  to  leave  P  by  publishing  fraudu- 
lent misrepresentations  concerning  P.     To  what  relief,  if  any,  is  P 
entitled  ? 

5.  P  and  D,  rival  employers,  are  seeking  to  employ  X  and  others.     D  secures 
their  services  (a)  by  offers  of  higher  wages,  (b)  by  publishing  false  state- 
ments concerning  P,  and  (c)  by  threats  of  violence.    To  what  relief,  if 
any,  is  P  entitled  ? 

THE  MASTER  STEVEDORES'  ASSOCIATION  v.  WALSH 

2  Daly's  New  York  Reports  i  (1867) 

This  was  a  demurrer  to  the  complaint,  on  the  ground  that  it 
did  not  state  facts  sufficient  to  constitute  a  cause  of  action. 

The  plaintiffs  are  a  corporation  of  which  the  defendant  is  a 
member,  and  is,  as  its  name  imports,  an  association  of  master  steve- 
dores. The  association  adopted  a  by-law  or  "pledge"  to  the  effect 
that  there  should  be  no  variations  from  the  prices  adopted  by  the 
association,  and  that  if  any  member,  after  an  investigation  by  a  com- 
mittee, should  be  found  guilty  of  working  for  less  than  the  prices  fixed, 
he  should  forfeit  to  the  association  25  per  cent  of  the  amount  of  such 
bill  as  fixed,  which  penalty  might  be  collected  in  the  name  of  the 
corporation  by  due  process  of  law. 

217 


2i8  LAW  AND  BUSINESS 

The  complaint  alleges  that  the  by-law  was  subscribed  to  by  the 
defendant,  that  the  corporation  had  fixed  the  rate  of  discharging 
railroad  iron  from  vessels  at  thirty-two  cents  a  ton,  and  that  the 
defendant  discharged  fifteen  hundred  tons  in  violation  of  this  regula- 
tion; that  he  was  consequently  found  guilty  by  the  association  of 
working  for  less  than  the  recognized  price,  and  incurred  a  penalty  of 
$125,  for  the  recovery  of  which  the  action  is  brought. 

DALY,  F.  J.  The  complaint  is  demurred  to  upon  the  ground  that 
no  action  lies  upon  the  facts  stated,  the  specific  objection  raised  by 
the  demurrer  being  that  the  by-law  is  illegal  because  the  object  it  is 
designed  to  effect  is  one  that  is  forbidden  by  law,  and  that  no  action 
can  consequently  be  maintained  upon  it. 

It  is  not,  nor  has  it  ever  been,  a  rule  of  the  common  law  that  any 
mutual  agreement  among  journeymen  for  the  purpose  of  raising  their 
wages  is  an  indictable  offense,  or  that  they  are  guilty  of  a  conspiracy 
if,  by  preconcert  and  arrangement,  they  refuse  to  work  unless  they 
receive  an  advance  of  wages.  The  Chief  Justice  admitted  that  he 
had  found  but  few  adjudications  upon  the  subject,  and  that  the 
offense  of  conspiracy  had  been  left  in  greater  uncertainty  by  the 
common  law  than  most  offenses.  He  remarked  that  precedents  in 
the  absence  of  adjudications  were  some  evidence  of  what  the  law  is, 
and  he  referred  to  several,  but  none  of  them  warrant  the  conclusion 
that  they  were  founded  upon  any  rule  of  the  common  law.  He 
referred  to  but  two  adjudged  cases:  The  King  v.  The  Journeymen 
Tailors  of  Cambridge,  8  Modern,  n,  and  The  Tub  Women  v.  The 
Brewers  of  London,  the  last  of  which  cases,  he  says,  has  been  cited  as 
sound  law  by  all  subsequent  criminal  writers.  There  is  no  report  of 
any  case  under  such  a  name  as  The  Tub  Women  v.  The  Brewers  of 
London.  It  is  merely  mentioned  by  name  in  the  case  first  above 
cited,  as  authority  for  the  proposition  that  a  conspiracy  of  any  kind 
is  illegal,  though  the  matter  about  which  the  parties  conspired  might 
have  been  lawful  for  them,  or  any  of  them,  to  do,  if  they  had  not 
conspired  to  do  it.  The  first  volume  of  the  Modern  Reports,  in  which 
this  reference  is  found,  is  one  of  the  least  reliable  of  the  English  reports, 
being  full  of  inaccuracies,  blunders,  and  misstatements.  BURROWS,  in 
his  reports,  speaks  of  it  as  a  "miserable,  bad  book,"  and  says,  that  upon 
being  cited,  the  Court  of  King's  Bench  treated  it  with  the  contempt 
it  deserved  (i  Burr.  386;  3  id.  1326);  and  by  an  excellent  authority 
upon  the  books  of  reports  and  their  reporters,  it  is  characterized  by 
the  epithet  of  execrable  (Wallace's  Common  Law  Reports,  3d  ed., 


COMPETITIVE  LABOR  PRACTICES  219 

p.  226).  The  title,  "The  Tub  Women  v.  The  Brewers  of  London/'  is 
undoubtedly  a  mistake,  and  it  has  been  conjectured  that  the  case 
referred  to  is  The  King  v.  Sterling  and  Others,  reported  in  i  Lev.  125; 
i  Sid.  274;  i  Keb.  350.  I  entertain  no  doubt  but  that  this  conjec- 
ture is  correct,  and  a  brief  statement  of  that  case  will  suffice  to  show 
what  was  determined  by  it.  The  defendants — brewers  of  London — 
were  found  guilty  of  a  conspiracy  for  agreeing  that  they  would  brew 
no  small  beer,  which  was  the  drink  of  the  poor,  for  a  certain  length  of 
time,  nor  ale,  except  at  a  certain  price,  with  the  intent  of  moving  the 
common  people  to  pull  down  the  excise-house  and  to  bring  the  excise- 
men into  public  odium,  that  they  might  be  impoverished  and  disabled 
from  paying  their  rent  to  the  government,  to  the  diminution  of  the 
revenue;  which  was  a  very  clear  case  of  conspiracy,  the  design  being 
to  impair  the  public  revenue,  to  inflict  pecuniary  injury  upon  all 
excisemen,  and  to  stir  up  a  public  tumult.  Assuming  it  to  be,  as  I 
have  no  doubt  it  is,  the  case  referred  to  under  the  supposititious  title 
of  the  "The  Tub  Women  v.  Brewers  of  London,"  it  would  have  been 
more  correct  to  have  said  that  it  warrants  the  conclusion  that  though 
the  brewers,  or  any  of  them,  had  the  right  to  cease  brewing,  or  to 
raise  the  price  of  their  ale,  it  was  unlawful  for  them  to  combine  to  do 
so  for  such  an  object  as  the  one  above  stated.  The  case  is  an  authority 
simply  for  a  familiar  principle  of  the  criminal  law,  that  it  is  a  conspir- 
acy to  combine  to  do  a  lawful  act  for  an  unlawful  purpose,  or  by  unlaw- 
ful means. 

As  respects  the  remaining  case  (The  King  v.  The  Journeymen 
Tailors  of  Cambridge),  it  is  also  found  in  this  discredited  volume  of 
reports,  in  further  condemnation  of  which  I  may  cite  the  remark  of 
an  eminent  English  judge,  JUSTICE  WILMOT,  that,  "nine  cases  out 
of  ten  in  this  book  are  totally  mistaken"  (The  King  v.  Harris,  7 
Term  R.  238).  But  even  the  case,  as  reported  there,  affords  no  ground 
for  the  inference  that  there  was  any  such  rule  at  the  common  law  as 
CHIEF  JUSTICE  SAVAGE  supposed.  In  1721,  when  the  case  was  de- 
cided, there  were  acts  of  Parliament  regulating  the  rate  of  wages.  The 
defendants,  according  to  the  report,  were  indicted  for  refusing  to 
work  unless  they  received  higher  rates  than  the  statute  allowed.  And, 
as  far  as  can  be  gathered  from  the  confused  statement  of  the  reporter, 
the  conviction  was  held  to  be  good,  because  they  had  conspired  to 
raise  their  wages  beyond  what  the  law  permitted.  These  early 
English  statutes,  regulating  the  price  of  labor,  being  wholly  inappli- 
cable to  us  in  our  colonial  condition,  were  never  in  force  in  this  country, 


220  LAW  AND  BUSINESS 

and  formed  no  part  of  the  law  of  the  Colony  of  New  York,  at  the 
adoption  of  our  State  Constitution  in  1777.  This  decision,  there- 
fore, was  limited  to  England,  deriving  its  whole  effect  from  the  English 
statute,  the  provisions  of  which  it  was  held  that  defendants  had  con- 
spired to  defeat. 

CHIEF  JUSTICE  GIBSON  declared  in  1821,  that  it  had  never  been 
decided  in  England  that  it  was  unlawful  for  journeymen  to  agree 
that  they  would  not  work,  except  for  certain  wages,  or  for  master 
workmen  to  agree  that  they  would  not  employ  any  journeymen, 
except  at  certain  rates  (Commonwealth  v.  Carlisle,  Hall's  Journal  of 
Jurisprudence  for  1822,  I,  225).  And  in  corroboration  t>f  the  state- 
ment of  this  very  accurate  and  eminent  jurist,  I  would  add  that  I 
have  examined  down  to  the  present  time,  and  have  found  no  case, 
either  in  this  country  or  in  England,  in  which  any  such  decision  has 
been  rendered. 

In  the  Commonwealth  v.  Hunt  (4  Mete,  in),  CHIEF  JUSTICE 
SHAW  considered  this  question,  and  laid  down  the  broad  proposition 
that  men  are  free  to  work  for  whom  they  please,  or  not  to  work  if 
they  so  prefer,  and  that  it  is  not  criminal  for  them  to  agree  together 
to  exercise  this  right  in  such  a  manner  as  may  best  subserve  their  own 
interest;  and  in  the  case  of  the  Hartford  Carpet  Weavers,  tried  before 
the  Superior  Court  in  Connecticut,  in  1836,  printed  at  Hartford, 
1836,  CHIEF  JUSTICE  WILLIAMS  told  the  jury  that  if  the  real  nature 
of  the  agreement  between  the  defendants  was  an  agreement  not  to 
work  below  certain  prices,  that  that  was  not  an  indictable  offense,  nor 
the  subject  of  a  civil  action;  that  it  had  been  so  determined  in  that 
court,  and  under  this  ruling  the  defendants  were  acquited.  The  case 
is  entitled  to  great  weight.  It  was  the  third  trial.  A  great  deal  of 
time  was  given  to  it,  more  than  seventy  witnesses  having  been 
examined.  It  was  elaborately  argued  by  counsel,  and  the  ruling  of 
the  Chief  Justice  was  made  after  the  case  had  been  considered  upon 
appeal. 

The  distinction  which  this  statute  (Act  of  5  Geo.  IV.  c.  95), 
makes  between  the  legality  of  associations  among  workmen  for  the 
protection  of  then*  interests,  by  agreeing  as  a  body  not  to  work  below 
certain  prices,  and  an  illegal  combination  formed  for  the  purpose  of 
making  it  compulsory  upon  all  journeymen  in  a  particular  branch  of 
business,  and  upon  the  employers,  to  conform  to  certain  prices  by 
imposing  penalties  upon  the  journeymen  in  a  city  or  town  who  refuse 
to  do  so,  or  by  agreeing  as  a  body  not  to  work  for  any  employer  who 


COMPETITIVE  LABOR  PRACTICES  221 

will  employ  such  a  journeyman,  or  one  who  will  not  pay  the  penalty 
or  become  a  member  of  the  combination,  or  which  seeks  to  accomplish 
such  a  purpose  by  violence,  intimidation,  or  other  unlawful  means, 
is  one  that  has  been  slowly  arrived  at  in  England,  and  toward  which 
the  courts  in  this  country  have  been  gradually  approximating,  for 
the  reason  that  it  has  its  foundation  in  the  plainest  principles  of 
justice.  The  apprehension  that  if  this  be  conceded  it  would  place 
employers  wholly  at  the  mercy  of  their  workmen,  who  would  have  it 
in  their  power  to  exact  any  sum  for  their  services,  however  extrava- 
gant, is  altogether  an  imaginary  one.  It  is  not  possible  by  any 
organization  among  journeymen  to  bring  about  such  a  result.  The 
history  of  English  legislation  upon  the  subject  of  wages,  and  of  the 
operations  of  trades  unions,  shows  that  it  is  neither  in  the  power  of 
prohibitory  laws  nor  of  artificial  combinations  to  control  arbitrarily 
the  price  of  labor,  and  that  no  combination  can  devise  any  general 
regulation  or  scheme  that  will  bring  to  the  same  level  the  skilful  and 
the  incompetent,  the  diligent  and  the  idle.  All  such  matters  regulate 
themselves.  If  labor  is  in  demand,  the  rate  of  compensation  will  be 
enhanced  in  proportion;  and  if  it  is  not,  no  combination  among  work- 
men can  prevent  the  falling  of  prices.  Voluntary  associations  among 
workmen,  or  agreements  among  them  not  to  work  except  for  certain 
prices,  are  effectual  only  when  their  demands  are  just  and  reasonable, 
and  when  they  attempt  anything  more,  they  not  only  fail  of  their 
object,  but  are  themselves  the  chief  sufferers.  Workmen  hi  every 
branch  or  calling  are  too  universally  diffused  to  depend  upon  their 
necessities,  and  too  diverse  in  their  interests  to  make  it  possible  by 
organization  to  accomplish  anything  beyond  this,  for  if  those  in  any 
one  place  ask  what  is  exceptionable  or  unreasonable,  by  the  natural 
law  of  demand  and  supply  others  will  come  in  and  take  their  places. 
But  it  may  be  in  their  power  to  secure  by  associated  effort  what 
it  would  not  be  possible  for  any  one  of  them  to  accomplish  alone; 
and  that  they  should  have  the  right  to  associate  together  for 
the  mutual  protection  of  their  individual  interest  is  so  plain,  that  it 
is  singular  that  it  should  ever  have  been  questioned.  Journeymen 
may  be  as  well  acquainted  as  their  employers  with  the  causes  which 
affect  the  price  of  labor,  and  in  this  country  are  generally  well  informed 
in  such  matters.  They  may  be  quite  as  well  able  to  judge  whether 
the  ordinary  profits  of  employers  justify  a  reduction  or  an  increase  in 
the  rate  of  wages.  Why,  then,  should  they  not  have  the  right  to 
come  together  to  consider  the  condition  of  the  branch  of  industry  in 


222  LAW  AND  BUSINESS 

which  they  are  operatives,  to  impart  information  to  each  other,  to 
exchange  their  views,  and  discuss  in  a  body  a  matter  in  which  they 
are  so  deeply  interested  ?  Merchants  meet  daily  upon  'Change  that 
they  may  be  thoroughly  informed  upon  all  matters  relating  to  the 
traffic  in  which  they  are  engaged;  and  why  should  not  journeymen 
meet  together  to  consider  and  act  upon  a  subject  so  important  to 
them  as  the  general  rate  of  wages  ?  The  exact  sum  which  should 
be  required  for  a  day's  wages  may  be  fluctuating  and  uncertain 
through  the  operation  of  other  causes  than  those  of  demand  and 
supply,  such  as  the  instability  of  the  currency,  by  which  the  value 
of  the  paper  representative  of  a  dollar  changes  as  the  circulating 
medium  is  increased  or  diminished.  These  are  matters  for  the  con- 
sideration of  workmen  as  well  as  all  other  causes  affecting  the  price 
of  their  labor;  and  if  they  come  together,  and  as  the  result  of  their 
deliberations  conclude  that  a  certain  rate  would  be  just  and  reason- 
able, and  that  they  will  not  work  for  less,  it  would  be  the  height  of 
injustice  to  call  such  an  act  a  crime,  by  declaring  that  it  was,  in  the 
language  of  the  statute,  unlawfully  conspiring  to  commit  an  act 
injurious  to  trade  or  commerce  for  which  each  of  them  may  be  indicted 
and  punished. 

It  is  better  for  the  law  to  leave  such  matters  to  the  action  of  the 
parties  interested — to  leave  master  workmen  or  journeymen  free  to 
form  what  associations  they  please  in  relation  to  the  rate  of  compensa- 
tion, so  long  as  they  are  voluntary.  They  mutually  act  upon  each 
other.  If  the  workmen  demand  too  much,  or  the  masters  offer  too 
little,  such  a  state  of  things  cannot  continue  long,  or  be  productive 
of  any  serious  inconvenience  to  the  community,  as  that  party  must 
ultimately  give  way  whose  pretensions  are  not  founded  in  reason  and 
justice  (Regina  v.  Harris,  i  Carr.  and  Marsh.  662).  It  is  otherwise, 
however,  where  organizations  are  formed  to  intimidate  employers,  or 
to  coerce  other  journeymen;  and  it  matters  little  what  are  the  meas- 
ures adopted,  if  the  object  of  them  is  to  interfere  with  the  rights  or 
to  control  the  free  action  of  others.  It  was  held,  under  the  English 
statute  I  have  referred  to,  that  it  did  not  authorize  workmen  to  com- 
bine for  the  purpose  of  dictating  to  a  master  whom  he  should  employ 
(Rex  v.  Rykerdyke,  i  M.  and  Kobs,  179);  and  the  several  convictions 
in  this  country  have  been  in  cases  where  coercive  measures  were 
resorted  to,  either  to  prevent  master  workmen  from  employing 
journeymen  except  at  certain  rates,  or  to  intimidate  journeymen 
from  engaging  below  such  rates,  or  to  compel  them  to  become  mem- 


COMPETITIVE  LABOR  PRACTICES  223 

bers  of  the  combination.  Every  man  has  the  right  to  fix  the  price 
of  his  own  labor — to  work  for  whom  he  pleases,  and  for  any  sum  he 
thinks  proper;  and  every  master  workman  has  equally  the  right  to 
determine  for  himself  whom  he  will  employ  and  what  wages  he  will 
pay.  Any  attempt  by  force,  threat,  intimidation,  or  other  coercive 
means  to  control  a  man  in  the  fair  and  lawful  exercise  of  these  rights 
is  therefore  an  act  of  oppression,  and  any  combination  for  such  a 
purpose  is  a  conspiracy. 

It  may,  therefore,  be  laid  down  as  the  result  of  this  examination, 
that  it  is  lawful  for  any  number  of  journeymen  or  master  workmen 
to  agree  on  the  one  part  that  they  will  not  work  below  certain  rates, 
or  on  the  other  that  they  will  not  pay  above  certain  prices;  but  that 
any  association  or  combination  for  the  purpose  of  compelling  journey- 
men or  employers  to  conform  to  any  rules,  regulation,  or  agreement 
fixing  the  rate  of  wages,  to  which  they  are  not  parties,  by  the  imposi- 
tion of  penalties,  by  agreeing  to  quit  the  service  of  any  employer  who 
employs  a  journeyman  below  certain  rates,  unless  the  journeyman 
pays  the  penalty  imposed  by  the  combination,  or  by  menaces,  threats, 
or  intimidations,  violence  or  other  unlawful  means,  is  a  conspiracy 
for  which  the  parties  entering  into  it  may  be  indicted. 

The  demurrer  must  be  overruled. 

QUESTIONS 

1.  What  was  a  conspiracy  under  the  common  law?    Was  it  a  criminal 
offense  ?    Was  there  any  civil  liability  for  a  conspiracy  ? 

2.  What  were  the  means  used  in  the  principal  case  to   establish   the 
end  sought  ?    Were  these  means  fair  and  reasonable  ? 

3.  Suppose  that  the  organization  had  used  fraud,  defamation,  violence, 
or  threats  of  them  to  establish  the  end  in  view,  what  would  have  been 
the  decision  of  the  court  ? 

4.  What  was  the  end  sought  by  the  defendant  in  this  case?    Was  the  end 
sought  legitimate  ? 

5.  By  what  standard  or  standards  are  the  legitimacy  of  the  purposes  of  an 
organization  to  be  determined  ?    Who  determines  these  standards  ? 

KEMP  v.  DIVISION  NO.  241 
255  Illinois  Reports  213  (1912) 

This  was  a  bill  filed  by  certain  employees  of  the  Chicago  Rail- 
ways Co.  against  Division  241  of  the  Amalgamated  Association  of 
Street  and  Electric  Railway  Employees  of  America,  the  corporation, 
the  officers,  and  members  of  its  executive  board.  Its  purpose  was 


224  LAW  AND  BUSINESS 

to  obtain  an  injunction  restraining  the  appellants,  the  agents,  and 
servants  from  attempting  to  secure  the  discharge  of  the  appellees 
from  the  service  of  the  Chicago  Railways  Co.  because  the  appellees 
were  not  members  of  the  said  Division  241. 

The  Circuit  Court  of  Cook  County  sustained  a  demurrer  to  the 
bill.  The  appellees  prosecuted  a  bill  to  the  Appellate  Court  where 
the  decree  sustaining  the  demurrer  was  overruled.  The  Appellate 
Court  granted  a  certificate  of  importance  and  the  appellants  prosecute 
this  appeal  to  the  Supreme  Court. 

COOKE,  J.  The  only  reasonable  conclusion  to  be  deduced  from 
the  allegations  and  prayer  of  the  bill  is  that  appellees  by  this  proceed- 
ing seek  to  restrain  the  union  and  its  officers  from  calling  a  strike  of 
its  members,  the  obvious  purpose  of  the  injunction  sought  being  to 
prevent  the  union  employees  of  the  railways  company  from  quitting 
their  employment  in  accordance  with  the  vote  previously  taken  by 
which  those  employees,  as  members  of  the  union,  declared  that  they 
would  "  cease  to  work  with  men  who  after  receiving  benefits  through 
our  organization  refuse  to  continue  members,"  appellees  belonging  to 
the  class  of  men  with  which  the  union  employees  had  thus  declared 
they  would  no  longer  work.  The  question  presented  for  our  deter- 
mination therefore  is  whether  a  court  of  equity  is  authorized  upon 
application  by  the  non-union  employees  to  restrain  a  union  and  its 
officers  from  calling  a  strike  of  the  union  employees  in  accordance 
with  the  vote  previously  taken  by  the  union  employees  as  members  of 
the  union,  where  the  purpose  of  the  proposed  strike  is  to  compel  the 
employer  to  discharge  the  non-union  employees  who  are  engaged  in 
the  same  class  of  work.  In  order  to  decide  this  question  in  the  affirma- 
tive it  would  be  necessary  to  hold  that  had  the  threatened  act  been 
completed,  appellees  would  have  been  entitled  to  maintain  an  action 
for  damages  against  the  union  and  its  offices  for  accomplishing  their 
discharge  from  the  service  of  the  railways  company,  and  that  such 
action  at  law  would  not  afford  an  adequate  remedy  because  of  the 
financial  inability  of  appellants  to  respond  in  adequate  damages  for 
the  injuries  which  appellees  would  suffer  by  reason  of  their  discharge. 
The  inadequacy  of  the  remedy  at  law  sufficiently  appears  from  the 
bill,  and  it  will  only  be  necessary  to  determine  whether  the  appellees 
would  have  been  entitled  to  maintain  the  action  for  damages  had 
their  discharge  been  accomplished  by  appellants. 

That  appellees  would  sustain  damages  if  discharged  by  the  rail- 
ways company,  and  that  such  discharge  and  consequent  damages 


COMPETITIVE  LABOR  PRACTICES  225 

would  be  occasioned  by  the  acts  of  the  appellants,  acting  for  and  on 
behalf  of  the  union  employees,  clearly  appears  from  the  bill.  The 
mere  fact  that  one  person  sustains  damage  by  reason  of  some  act  of 
another  is  not,  however,  sufficient  to  render  the  latter  liable  40  an 
action  by  the  former  for  such  damage,  but  it  must  further  appear 
that  the  act  which  occasioned  the  damage  was  a  wrongful  act  and 
not  one  performed  in  the  exercise  of  a  legal  right,  otherwise  it  is 
damnum  absque  injuria.  In  Cooley  on  Torts,  at  page  81,  it  is  said: 
It  is  damnum  absque  injuria,  also,  if  through  the  lawful  and  proper 
exercise  by  one  man  of  his  own  rights  a  damage  is  caused  to  another,  even 
though  he  might  have  anticipated  the  result  and  avoided  it.  That  which 
it  is  right  and  lawful  for  one  man  to  do  cannot  furnish  the  foundation  for 
an  action  in  favor  of  another.  Nor  can  the  absence  of  commendable  motive 
on  the  part  of  the  party  exercising  his  rights  be  the  legal  substitute  or 
equivalent  for  the  thing  amiss,  which  is  one  of  the  necessary  elements  of  a 
wrong. 

Again,  on  page  688  of  the  same  work  it  is  said: 

What  was  said  in  the  opening  chapter  of  the  work,  that  the  exercise 
by  one  man  of  his  legal  right  cannot  be  a  legal  wrong  to  another,  has  been 
abundantly  shown  to  be  justified  by  the  authorities,  even  if  it  were  not,  in 
itself,  a  mere  truism.  To  state  the  point  in  a  few  words:  whatever  one 
has  a  right  to  do,  another  can  have  no  right  to  complain  of. 

Every  employee  has  a  right  to  protection  in  his  employment  from 
the  wrongful  and  malicious  interference  of  another  resulting  in  damage 
to  the  employee,  but  if  such  interference  is  but  the  consequence  of 
the  exercise  of  some  legal  right  by  another  it  is  not  wrongful,  and 
cannot,  therefore,  be  made  the  basis  for  an  action  to  recover  the  con- 
sequent damages.  It  is  the  right  of  every  workman,  for  any  reason 
which  may  seem  sufficient  to  him.  or  for  no  reason,  to  quit  the  service 
of  another,  unless  bound  by  contract.  This  right  cannot  be  abridged 
or  taken  away  by  any  act  of  the  legislature,  nor  is  it  subject  to  any 
control  by  the  courts,  it  being  guaranteed  by  the  Thirteenth  Amend- 
ment to  the  Federal  Constitution,  which  declares  that  involuntary 
servitude,  except  as  a  punishment  for  crime,  shall  not  exist  within  the 
United  States  or  any  place  subject  to  their  jurisdiction.  Incident  to 
this  constitutional  right  is  the  right  of  every  workman  to  refuse 
to  work  with  any  co-employee  who  is  for  any  reason  objectionable  to 
him,  provided  his  refusal  does  not  violate  his  contract  with  his 
employer,  and  there  is  no  more  foundation  for  the  contention  that 
the  employee  commits  an  actionab  le  wrong  by  informing  the  employer 


226  LAW  AND  BUSINESS 

before  he  leaves  the  service,  that  he  will  not  work  with  the  objection- 
able co-employee,  and  thereby  occasioning  his  discharge,  than  there 
would  be  for  the  contention  that  the  employee  would  commit  an 
actionable  wrong  by  quitting  the  service  and  afterward  stating  to  the 
employer  his  reason  therefor,  if  as  a  result  thereof  the  employer  should 
choose  to  discharge  the  objectionable  co-employee.  In  either  case 
the  employee  is  exercising  a  legal  right,  and  although  it  results  in 
damage  to  the  objectionable  co-employee,  the  latter  has  no  cause  of 
action  against  the  former  for  causing  his  discharge.  In  the  case  at 
bar,  had  the  union  employees  as  individuals  and  without  any  pre- 
arranged concert  of  action,  each  informed  the  railways  company  that 
they  would  no  longer  work  with  appellees  because  appellees  were  not 
members  of  the  union,  and  had  appellees,  in  consequence  thereof, 
been  discharged  because  the  railways  company  chose  to  retain  the 
services  of  the  union  employees,  appellees  would  have  no  cause  of 
action  against  the  union  employees  for  thus  causing  their  discharge. 
Does  the  fact  that  the  union,  its  officers  and  committees,  acted  as  an 
intermediary  between  the  union  employees  and  the  railways  com- 
pany, and  under  the  circumstances  and  for  the  purposes  disclosed 
by  the  bill,  render  unlawful  the  action  by  it  or  them  which  would 
have  been  lawful  if  performed  by  the  union  employees  individually  ? 

Labor  unions  have  long  since  been  recognized  by  the  courts  of 
this  country  as  a  legitimate  part  of  the  industrial  system  of  this  nation. 
The  ultimate  purpose  of  such  organizations  is,  through  combination, 
to  advance  the  interests  of  the  members  by  obtaining  for  them 
adequate  compensation  for  their  labor,  and  it  has  been  frequently 
decided  by  the  American  courts  that  the  fact  that  this  purpose  is 
sought  to  be  obtained  through  combination  or  concerted  action  of 
employees  does  not  render  the  means  unlawful.  In  Franklin  Union  v. 
People,  220  111.  355,  we  said: 

It  will  be  readily  conceded  by  all  that  labor  has  the  right  to  organize 
as  well  as  capital,  and  that  the  members  of  Franklin  Union  No.  4  (being  a 
labor  union)  had  the  same  legal  right  to  organize  said  union  as  the  members 
of  the  Chicago  Typothetae  (being  an  association  of  employers)  had  to  form 
that  association,  and  that  the  members  of  Franklin  Union  No.  4  had  the 
legal  right  to  quit  the  employment,  either  singly  or  in  a  body,  of  the  members 
of  said  association,  with  or  without  cause,  if  they  saw  fit,  without  rendering 
themselves  amendable  to  the  charge  of  conspiracy,  and  that  the  courts 
would  not  have  been  authorized  to  enjoin  them  from  so  doing  even  though 
their  leaving  the  employment  of  the  members  of  the  association  involved  a 
breach  of  a  contract. 


COMPETITIVE  LABOR  PRACTICES  227 

Again,  in  Wilson  v.  Hey,  232  111.  389,  we  said:  "The  right  of 
laboring  people  to  organize  for  the  purpose  of  promoting  their  common 
welfare  by  lawful  means  is  fully  recognized." 

The  purpose  of  organizing  labor  unions  is  to  enable  those 
employees  who  become  members  to  negotiate  matters  arising  between 
them  and  their  employers  through  the  intermediation  of  officers  and 
committees  of  the  union  and  to  accomplish  their  ends  through  con- 
certed action.  If  duly  authorized  by  the  employees  to  adjust  any 
controversy  arising  between  them  and  their  employer,  the  union,  its 
officers,  and  committees  are  merely  acting  as  agents  of  the  employees 
in  the  matter.  If  the  union  employees  had  the  legal  right  to  inform 
their  employer  of  their  refusal  to  work  with  appellees,  they  had  the 
legal  right  to  convey  that  information  to  the  employer  through  an 
agent  or  agents,  and  the  agent  or  agents  would  not  commit  an  action- 
able wrong  thereby  nor  by  reporting  back  to  the  union  employees  the 
result  of  the  conference  with  the  employer.  The  demand  that 
appellees  be  discharged,  and  the  threat  that  unless  the  railways  com- 
pany complied  with  the  demands  the  members  of  the  union  would  call 
a  strike  of  the  employees  of  the  railways  company,  in  effect,  meant 
no  more  than  the  mere  statement  that  the  union  employees  of  the 
railways  company  would  no  longer  work  with  the  non-union 
employees,  and  if  the  railways  company  chose  to  retain  in  its  employ 
the  non-union  men  the  union  employees  would  quit  the  service  of  the 
railways  company. 

A  strike  is  "  the  act  of  a  party  of  workmen  employed  by  the  same 
master  in  stopping  work  all  together  at  a  preconcerted  time,  and 
refusing  to  continue  until  higher  wages  or  shorter  time,  or  some  other 
concession,  is  granted  to  them  by  the  employer"  (Blacks's  Law 
Dictionary).  It  is  "a  combined  effort  of  workmen  to  obtain  higher 
wages  or  other  concessions  from  their  employers  by  stopping  work 
at  a  preconcerted  time"  (Bouvier's  Law  Dictionary).  The  threat 
made  by  the  committee  that  the  members  of  the  union  would  call  a 
strike  of  the  employees  of  the  railways  company  unless  their  demands 
were  complied  with  meant  no  more  than  that  the  union  employees 
would  be  notified  to  quit  work  hi  a  body  at  a  definite  time  if  the  non- 
union employees  were  retained  in  the  service.  This  action  of  the 
committee,  if  not  then  authorized,  was  ratified  by  an  almost  unani- 
mous vote  of  the  union  employees,  and  the  union  employees  thereby 
authorized  and  instructed  the  union,  its  officers,  and  members  to 
call  the  strike  which  it  is  sought  by  this  proceeding  to  prevent.  The 


228  LAW  AND  BUSINESS 

contemplated  action  of  the  union  employees  is  not  the  result  of  the 
dictation  of  any  officer  or  officers  of  the  union  or  of  any  person  not 
interested  in  the  employment,  but  is  the  voluntary  action  of  the  union 
employees  of  the  railways  company.  The  threatened  act  of  the  union 
and  its  members  is  therefore,  in  effect,  the  act  of  the  union  employees 
themselves,  and  if  those  employees  have  the  right  to  perform  the  act 
by  concerted  action  and  for  the  purposes  alleged,  their  authorized 
agents  commit  no  actionable  wrong  in  the  performance  thereof. 

As  has  been  pointed  out,  had  the  union  employees,  as  individuals 
and  without  prearrangement,  each  informed  the  railways  company 
that  they  would  no  longer  work  with  appellees,  and  had  the  employer 
voluntarily  chosen  to  discharge  appellees  rather  than  lose  the  services 
of  the  union  employees,  they  would  have  no  cause  of  action  against 
the  union  employees.  No  contract  rights  being  involved,  the  union 
employees  had  a  right  to  quit  the  service  of  the  railways  company, 
either  singly  or  in  a  body,  for  any  reason  they  chose  or  for  no  reason 
at  all.  If  the  only  purpose  of  the  union  employees  was  to  quit  the 
service  and  permanently  sever  their  connections  with  their  employer, 
appellees  would  in  nowise  be  damaged  and  could  have  no  grounds  for 
injunctive  relief.  The  bill  discloses,  however,  that  this  was  not  the 
only  purpose  of  the  members  of  the  union.  They  did  not  purpose 
absolutely  to  sever  their  connection  with  their  employer,  but  by  means 
of  a  strike  to  withdraw  temporarily  their  services,  and  then,  by  such 
means  as  might  be  proper  and  permissible,  seek  to  induce  their 
employer  to  accede  to  their  demands  and  reinstate  them  in  the  service 
under  the  conditions  they  sought  to  impose.  By  thus  combining  it 
becomes  necessary  to  inquire  whether  the  purpose  of  the  combina- 
tion was  a  lawful  one. 

Ordinarily  it  is  true  that  what  one  individual  may  rightfully  do 
he  may  do  in  combination  with  others.  In  some  jurisdictions  the 
question  of  the  purpose  or  motive  in  such  cases  as  this  is  not  inquired 
into.  But  in  other  jurisdictions  the  opposite  view  is  held,  for  the 
very  apparent  reason  that  acts  done  by  a  combination  of  individuals 
may  be  made  much  more  potent  and  effective  than  the  same  acts 
done  by  an  individual,  and  we  believe  the  greater  weight  of  authority 
to  be  that  what  one  individual  may  lawfully  do  a  combination  of 
individuals  has  the  same  right  to  do,  provided  they  have  no  unlawful 
purpose  in  view.  Would  the  calling  of  a  strike,  and  the  inducing  of 
an  employer  thereby  to  accede  to  the  demands  of  the  union  employees 
and  to  discharge  appellees  under  the  circumstances  disclosed,  be  such 


COMPETITIVE  LABOR  PRACTICES  229 

an  interference  with  the  rights  of  appellees  as  to  be  wrongful  and 
malicious  ? 

While  it  cannot  be  successfully  contended  that  every  strike  is 
lawful,  it  is  generally  conceded  by  our  courts  that  workmen,  may 
quit  in  a  body,  or  strike,  in  order  to  maintain  wages,  secure  advance- 
ment in  wages,  procure  shorter  hours  of  employment,  or  attain  any 
other  legitimate  object.  An  agreement  by  a  combination  of  indi- 
viduals to  strike  or  quit  work  for  the  purpose  of  advancing  their  own 
interests  or  the  interests  of  the  union  of  which  they  are  members  and 
not  having  for  its  primary  object  the  purpose  of  injuring  others  in 
their  business  or  employment  is  lawful.  As  to  whether  the  object 
which  this  bill  discloses  was  sought  to  be  attained  by  the  members  of 
the  union  was  a  lawful  one  or  a  valid  justification  of  the  threat  to 
strike,  the  authorities  in  this  country  are  clearly  in  conflict.  Among 
the  cases  in  other  jurisdictions  upon  which  appellees  rely  in  support 
of  their  contentions  on  this  point  are  Berry  v.  Donovan,  188  Mass. 
353,  Erdman  v.  Mitchell,  207  Pa.  79,  Lucke  v.  Clothing  Cutters,  77 
Md.  396.  Plant  v.  Woods,  176  Mass.  492,  and  Curran  v.  Galen,  152 
N.Y.  33.  That  some  of  the  cases  cited  by  appellees  support  their 
contention  cannot  be  denied.  A  contrary  result  has  been  reached, 
however,  by  the  courts  of  some  of  the  other  states.  This  precise 
question  has  never  been  passed  upon  in  this  state,  and  were  the 
position  of  appellees  to  be  sustained  it  would  be  a  long  step  in  advance 
of  any  decision  of  this  court.  In  the  unsettled  condition  of  the  law 
on  this  question  we  are  not  disposed  to  follow  the  cases  cited  by 
appellees.  We  are  of  the  opinion  that  the  cases  holding  the  contrary 
view  are  supported  by  the  better  reasoning. 

It  does  not  follow  from  a  consideration  of  all  the  material  allega- 
tions of  the  bill  that  the  primary  object  of  the  union  employees,  or  of 
the  union  officers  in  carrying  out  the  wishes  of  the  members,  was  to 
injure  appellees.  Neither  can  it  be  said  that  any  actual  malice  has 
been  disclosed  toward  the  appellees  or  an  intent  to  commit  a  wrongful 
or  harmful  act  against  them.  No  threats  are  made  and  no  violence  is 
threatened.  The  members  of  the  union  have  simply  said  to  their 
employer  that  they  will  not  longer  work  with  men  who  are  not  mem- 
bers of  their  organization,  and  that  they  will  withdraw  from  their 
employment  and  use  such  proper  means  as  they  may  to  secure  employ- 
ment under  the  desired  conditions.  While  this  is  not  a  combination 
on  the  part  of  the  union  employees  to  maintain  their  present  scale 
of  wages,  to  secure  an  advance  in  the  rate  of  wages  or  to  procure 


230  LAW  AND  BUSINESS 

shorter  hours  of  employment,  all  of  which  have  been  universally  held 
to  be  proper  and  lawful  objects  of  a  strike,  it  cannot  be  said  that  this 
is  not  a  demand  for  better  conditions  and  a  legitimate  object  for 
them  to  seek  to  attain  by  means  of  a  strike. 

It  is  insisted  that  a  strike  is  lawful  only  in  case  of  direct  competi- 
tion, and  as  it  cannot  be  said  that  the  union  employees  are  in  any 
sense  competing  with  appellees,  their  acts  cannot  be  justified.  It 
is  true,  as  has  been  stated,  that  the  proposed  strike  was  not  to  be 
called  for  the  direct  purpose  of  securing  better  wages  or  shorter 
hours  or  to  prevent  a  reduction  of  wages,  any  one  of  which  would 
have  been  a  proper  object.  The  motive  was  more  remote  than  that, 
but  it  was  kindred  to  it.  The  purpose  was  to  strengthen  and  preserve 
the  organization  itself.  Without  organization  the  workmen  would  be 
utterly  unable  to  make  a  successful  effort  to  maintain  or  increase  their 
wages  or  to  enforce  such  demands  as  have  been  held  to  be  proper. 
The  following  view  expressed  by  Mr.  CHIEF  JUSTICE  HOLMES  in  his 
dissenting  opinion  in  Plant  v.  Woods,  supra,  in  discussing  facts  similar 
to  those  here  involved,  is  in  our  opinion  a  correct  statement  of  the 
law  and  is  applicable  here. 

That  purpose  was  not  directly  concerned  with  wages.  It  was  one 
degree  more  remote.  The  immediate  object  and  motive  was  to  strengthen 
the  defendants'  society  as  a  preliminary  and  means  to  enable  it  to  make  a 
better  fight  on  questions  of  wages  or  other  matters  of  clashing  interests. 
I  differ  from  my  brethren  in  thinking  that  the  threats  were  as  lawful  for 
this  preliminary  purpose  as  for  the  final  one  to  which  strengthening  the 
union  was  a  means.  I  think  that  unity  of  organization  is  necessary  to 
make  the  contest  of  labor  effectual,  and  that  societies  of  laborers  lawfully 
may  employ  in  their  preparation  the  means  which  they  might  use  in  the 
final  contest. 

If  it  is  proper  for  workmen  to  organize  themselves  into  such 
combinations  as  labor  unions,  it  must  necessarily  follow  that  it  is 
proper  for  them  to  adopt  any  proper  means  to  preserve  that  organiza- 
tion. If  the  securing  of  the  closed  shop  is  deemed  by  the  members 
of  a  labor  union  of  the  utmost  importance  and  necessary  for  the  pres- 
ervation of  their  organization,  through  which,  alone,  they  have  been 
enabled  to  secure  better  wages  and  better  working  conditions,  and 
if  to  secure  that  is  the  primary  object  of  the  threat  to  strike,  even 
though  in  the  successful  prosecution  of  the  object  of  the  combination 
injury  may  result  incidentally  to  non-union  men  through  the  loss  of 
their  positions,  that  object  does  not  become  unlawful.  It  is  apparent 
that  in  this  case  the  sole  purpose  was  to  insure  employment  by  the 


COMPETITIVE  LABOR  PRACTICES  231 

railways  company  of  union  men,  only.  The  appellees  had  the  right 
to  retain  their  membership  in  the  union  or  not,  as  they  saw  fit.  On 
the  other  hand,  if  the  members  of  the  union  honestly  believed  that 
it  was  to  their  best  interests  to  be  engaged  in  the  same  employment 
with  union  men  only,  and  that  it  was  a  detriment  and  a  menace  to 
their  organization  to  associate  in  the  same  employment  with  non- 
members,  it  was  their  right  to  inform  the  common  employer  that 
they  would  withdraw  from  its  service  and  strike  unless  members  of 
the  union,  only,  were  employed,  even  though  an  acquiescence  in  their 
demands  would  incidentally  result  in  the  loss  of  employment  on  the 
part  of  the  non-union  men.  It  was  only  incumbent  upon  them  to  act 
in  a  peaceful  and  lawful  manner  in  carrying  out  their  plans.  In 
passing  upon  this  question  the  court,  in  Jersey  City  Printing  Co.  v. 
Cassidy,  63  NJ.  Eq.  759,  says:  "Union  workmen  who  inform  their 
employer  that  they  will  strike  if  he  refuses  to  discharge  all  non-union 
workmen  in  his  employ  are  acting  within  their  absolute  right,  and, 
in  fact,  are  merely  dictating  the  terms  upon  which  they  will  be 
employed."  This  case  was  approved  in  Booth  Brothers  v.  Burgess, 
72  N.J.  Eq.  181.  These  cases  hold  that  motive  is  not  to  be  con- 
sidered, and  that  the  settled  American  doctrine,  apart  from  all  recent 
statutes,  is,  that  all  dealers  in  the  market,  whether  in  merchandise  or 
in  labor,  on  every  side  of  the  market,  have  an  absolute  right  to  com- 
bine voluntarily  to  concurrently  exercise  their  several  rights  to  refrain 
from  contracting  if  they  see  fit  to  do  so,  and  that  if  this  is  not  good 
law,  then  the  right  to  refrain  from  contracting  is  subject  to  a  most 
extraordinary  limitation,  which  leads  to  absurd  results.  The  Supreme 
Court  of  Minnesota  has  said:  "  The  authorities,  as  already  noted,  very 
generally  hold  that  a  strike  is  not  unlawful;  that  members  of  labor 
unions  may  singly  or  in  a  body  quit  the  service  of  their  employer, 
and  for  the  purpose  of  strengthening  their  association  may  persuade 
and  induce  others  in  the  same  occupation  to  join  their  union,  and  as 
a  means  to  that  end  refuse  to  allow  their  members  to  work  in  places 
where  non-union  labor  is  employed."  Gray  v.  Building  Trades 
Council,  91  Minn.  171. 

The  judgment  of  the  Appellate  Court  is  reversed  and  the  decree 
of  the  circuit  court  is  affirmed. 

Judgment  reversed. 

QUESTIONS 

i.  What  was  the  end  sought  by  the  defendants  in  this  case?  Was  it  a 
legitimate  end  ?  What  means  were  used  to  accomplish  this  end  ?  Were 
the  means  used  fair  and  reasonable  ? 


232  LAW  AND  BUSINESS 

2.  What  would  have  been  the  decision  of  the  court  if  the  defendants,  after 
striking,  had  used  fraud,  defamation,  intimidation,  or  coercion  to  secure 
the  discharge  of  the  complainants  ? 

3.  D  and  others  are  working  for  P  under  an  arrangement  terminable  at 
the  will  of  either  party.    They  quit  work  in  a  body  because  P  refuses  to 
pay  them  higher  wages.     What  are  the  rights  of  P,  if  any,  under  the 
circumstances  ? 

4.  D  and  others  quit  work  in  a  body  because  P  will  not  discharge  X,  an 
unpopular  foreman,     (a)  What  are  the  rights  of  P,  if  any  ?     (b)  What 
are  the  rights  of  X,  if  any  ? 

5.  D  et  al.  strike  because  P  refuses  to  deal  with  them  through  Y,  not  an 
employee  of  P,  their  representative.     Discuss  the  legality  of  the  strike. 

6.  D  et  al.  strike  to  secure  the  discharge  by  P  of  all  non-union  workers. 
(a)  What  are  the  rights  of  P  against  D  et  al.  ?     (b)  What  are  the  rights 
of  the  non-union  workers  against  D  et  al.  ? 

7.  Would  the  decision  in  this  case  have  been  the  same  if  the  defendants 
had  refused  to  receive  the  complainants  into  their  union  ? 

8.  D  et  al.  strike  not  because  they  have  a  controversy  with  P  but  because 
P  will  not  accede  to  the  demands  of  X  et  al.  for  higher  wages.     Discuss 
the  legality  of  the  strike. 

9.  P,  a  non-union  carpenter,  is  employed  by  X  in  the  construction  of  a 
building.    D  et  al.,  members  of  a  plumbers'  union,  working  on  the 
same  building,  threaten  to  strike  because  X  will  not  discharge  P.     D  et  al. 
harbor  no  ill  will  toward  P  nor  do  they  have  any  particular  person  in 
mind  to  take  P's  place,  but  make  the  threat  for  the  cause  of  organized 
labor.    Discuss  the  legality  of  D's  conduct. 

EVERETT  WADDEY  COMPANY  v.  RICHMOND 
TYPOGRAPHICAL  UNION 

105  Virginia  Reports  188  (1906) 

This  appeal  arises  out  of  a  litigation  between  the  appellants, 
complainants  below,  members  of  the  unincorporated  association  known 
as  the  Richmond  Typothetae,  which  is  a  branch  of  the  United  Ty- 
pothetae  of  America,  the  membership  of  which  are  engaged  in  the 
business  of  printing;  and  the  appellees,  defendants  below,  are 
members  of  the  Richmond  Typographical  Union  No.  90,  a  branch 
of  the  International  Typographical  Union,  also  an  unincorporated 
association,  composed  of  a  large  majority  of  the  employees  of  the 
employing  printers  of  the  United  States.  The  main  object  of  the 
first-named  association  is  to  protect  and  advance  the  interests  of  its 
members  by  uniting  their  strength ;  while  that  of  the  second-named 
association  is  to  secure  for  its  members  better  terms  of  employment. 


COMPETITIVE  LABOR  PRACTICES  233 

In  September,  1905,  upon  a  refusal  of  the  complainants  to  grant 
the  demand  of  the  defendants  for  an  eight-hour  working  day,  the 
defendants  went  out  on  a  strike.  The  complainants  brought  this 
bill  asking  that  the  defendants  be  enjoined  from  illegally  interfering 
with  and  molesting  the  complainants  in  their  business.  There  was 
a  decree  in  favor  of  the  defendants  in  the  court  below.  The  complain- 
ants appealed. 

CARDWELL,  J.  It  seems  to  be  conceded,  in  accordance  with  a 
long  line  of  decisions,  that  if  the  allegations  of  the  bill  in  this  case 
are  sustained  by  the  proof,  it  is  a  case  for  equity  jurisdiction,  and  the 
remedy  is  by  injunction,  since  complainants'  remedy  at  law  would  be 
inadequate.  Beck  v.  Railway  Teamsters'  Protective  Union  (Mich.), 
77  N.W.  13;  Miller  v.  Wills,  95  Va.  327. 

It  is  now  well  settled  by  the  decisions  of  the  courts  of  the  United 
States  and  of  the  highest  courts  of  a  majority  of  the  states  in  the 
Union  that  labor  may  organize  as  capital  does  for  its  own  protection 
and  to  further  the  interests  of  the  laboring  class.  They  may  "strike" 
and  persuade  and  induce  others  to  join  them,  but  when  they  resort 
to  unlawful  means  to  cause  injury  to  others  to  whom  they  have  no 
relation,  contractual  or  otherwise,  the  limit  permitted  by  law  is 
passed  and  they  may  be  restrained.  Gray  v.  Trades  Council  (Minn.), 
97  N.W.  663,  63  L.R.A.  753,  103  Am.  St.  Rep.  477,  and  cases  there 
cited;  Plant  v.  Woods,  176  Mass.  492. 

In  many  of  the  states  of  the  Union  there  are  statutes  which  pro- 
vide for  the  incorporation  of  trades  unions  and  other  labor  organiza- 
tions, and  in  all  of  them  one  of  the  permissible  objects  of  incorporation 
is  declared  to  be  the  securement  of  better  terms  of  employment;  while 
at  common  law,  as  interpreted  by  the  English  decisions  and  a  few  of 
the  earliest  decisions  of  the  courts  in  this  country,  labor  combinations 
formed  for  the  purpose  of  controlling  the  rate  of  wages  were  regarded 
as  a  criminal  conspiracy.  But  these  early  decisions  of  the  courts  of 
this  country  were  soon  departed  from  by  other  cases,  notably  in 
Massachusetts,  New  York,  and  Pennsylvania,  which  placed  labor 
combinations  upon  a  place  of  legal  equality  with  capitalistic  com- 
binations by  holding  that  it  was  not  a  criminal  conspiracy  for  work- 
men to  combine  for  the  purpose  of  enhancing  the  rate  of  wages,  or  for 
improving,  in  any  other  way,  their  relations  with  employers. 

In  American  and  English  Encyclopedia  of  Law,  XVIII  (2d  ed.), 
87,  it  is  stated  to  be  the  law,  citing  a  number  of  decided  cases, 
that:  "It  is  not  unlawful  for  strikers,  by  persuasion,  to  cause 


234  LAW  AND  BUSINESS 

employees  to  leave  the  service  of  their  employer,  or  to  dissuade  other 
workmen  from  seeking  employment  with  him." 

But  on  the  other  hand  it  is  fully  as  well  settled  that  while 
"strikers"  have  the  right  to  argue  or  discuss  with  new  employees 
who  have  taken  their  places  the  question  whether  they  should  work 
for  the  employer  and  the  right  to  persuade  new  employees  not  to  do 
so,  if  they  can,  in  presenting  the  matter  they  have  no  right  to  use 
force  or  violence,  nor  to  terrorize  or  intimidate  the  new  employees. 
Union  Pacific  Railway  Co.  v.  Reuff,  120  Fed.  Rep.  102. 

In  Eddy  on  Combinations,  Vol.  II,  section  1031,  the  author  says: 
"Where  there  is  no  sufficient  evidence  of  violence,  force,  intimidation, 
or  coercion,  and  the  facts  simply  show  that  the  parties  complained 
of  are  persuading  workmen  still  employed  to  quit  their  employment, 
and  others,  about  to  accept  employment,  not  to  do  so,  and  that  the 
persuasion  consists  of  arguments,  personal  appeals,  and  induce- 
ments by  way  of  payment  of  traveling  expenses  to  other  localities, 
an  injunction  will  not  be  granted." 

.  The  gravamen  of  the  complaint  made  by  complainants  is  that  by 
bribery,  intimidation,  and  coercion  of  their  employees  by  defendants 
they  are  being  molested,  annoyed,  and  irreparably  damaged  in  their 
business.  They  claim  that  the  bribery  charged  consisted  of  the  pay- 
ment of  weekly  benefits  and  transportation  to  their  new  employees  by 
defendants'  union,  and  the  payment  directly  to  one  William  Wilde, 
an  employee  of  one  of  the  complainants,  the  sum  of  $140  to  leave, 
not  only  his  employment,  but  the  city  of  Richmond. 

Bribery  is  not  only  unlawful,  but  criminal,  and  when  resorted  to 
with  a  malicious  purpose  to  injure  a  third  party  in  his  business,  prop- 
erty, or  personal  liberty,  it  would  unquestionably  afford  ground  for 
equitable  interposition  by  injunction,  if  practiced  in  such  a  manner 
and  to  such  extent  that  the  party  injured,  or  intended  to  be  injured, 
could  not  obtain  an  adequate  remedy  at  law  for  his  injuries;  but  we 
have  not  been  cited  to  any  case,  nor  have  we  been  able  to  find  a  case, 
which  holds  that  the  payment  of  weekly  benefits  or  transportation, 
etc.,  to  members  of  a  labor  union  is  per  se  bribery.  It  is  the  rule  of 
such  unions  to  pay  weekly  benefits,  transportation,  etc.,  to  members, 
and  that  when  a  person  becomes  a  member  of  the  union  he  also 
becomes  entitled  to  these  benefits.  It  seems  to  have  been  the  rule 
of  the  union,  as  old  as  the  union  itself,  and  was  therefore  not  put  in 
force  because  of  this  strike.  It  is,  of  course,  one  of  the  inducements 
held  out  to  non-members  to  become  members  of  the  union,  and  is 


COMPETITIVE  LABOR  PRACTICES  235 

doubtless  used  as  one  of  the  arguments  to  induce  persons  to  join  the 
union,  and  it  is  the  rule  governing  like  associations,  such  as  secret 
orders,  beneficial  societies,  etc.,  and  we  have  seen  it  nowhere  ques- 
tioned that  such  union  or  society  has  the  right  to  make  and  carry 
out  such  a  rule  in  the  government  and  control  of  the  union  or  society. 
When  one  becomes  a  member  of  such  a  union  he  becomes  entitled  to 
the  benefits  given  by  the  union,  and  if  he  receives  any  of  them  the 
giving  or  taking  of  such  benefits  clearly  could  not  be  characterized 
as  bribery.1 

The  evidence,  we  think,  fails  to  make  a  case  showing  that  defend- 
ants have  in  any  way  so  molested,  annoyed,  or  damaged  the  com- 
plainants in  the  conduct  of  their  business  as  to  entitle  them  to  the 
extraordinary  relief  by  injunction. 

Affirmed. 

QUESTIONS 

1.  D  et  aL,  employees  of  P,  are  on  a  strike  for  higher  wages,     (a)  Through 
representatives,  they  are  persuading  and  attempting  to  persuade  other 
employees  of  P  to  join  them  in  the  strike,     (b)  They  are  dissuading 
prospective  employees  from  accepting  employment  from  P.    What  are 
the  rights  of  P,  if  any,  under  the  circumstances  ? 

2.  D  et  al.  induce  other  employees  to  join  the  strike  by  promising  to  receive 
them  into  the  union  and  to  give  them  strike  benefits.    Discuss  the 
legality  of  D's  conduct. 

3.  D  et  al.  dissuade  prospective  employees  from  accepting  employment 
with  P  by  furnishing  them  with  transportation  to  other  cities  where 
employment  can  be  secured.     P  asks  that  D  et  al.  be  enjoined  from 
continuing  such  practices.    What  decision  ? 

4.  D  et  al.  induce  X  to  leave  P's  employment  by  an  offer  to  pay  him  $500, 
not  as  a  strike  benefit  nor  as  money  for  transportation,  but  simply  as  a 
gift.     Discuss  the  legality  of  D's  conduct. 

5.  D  etal.,  by  misrepresentations  and  defamatory  statements  concerning  P , 
dissuade  prospective  employees  from   accepting  employment  from  P. 
What  are  the  rights  of  P,  if  any,  against  D  et  al.? 

1  The  discussion  of  the  question,  whether  the  payment  of  $  140  to  William 
Wilde  to  induce  him  to  leave  complainants'  employ  and  the  city  of  Richmond  was 
illegal,  is  omitted.  The  court  summarized  the  discussion  in  these  words:  "This 
plan  of  Wilde  to  obtain  money  from  the  union  is  shown  to  have  been  known  to 
one  or  more  of  the  complainants,  and  under  these  circumstances,  and  considering 
the  conflicting  and  contradictory  features  of  the  affidavits  he  has  made,  and  the 
admissions  of  bad  faith  he  also  makes,  we  take  the  view,  as  did  the  learned  judge 
below,  that  his  statements  are  entitled  to  little  or  no  consideration  in  the  determina- 
tion of  this  controversy." 


236  LAW   AND  BUSINESS 

JONES  v.  VAN  WINKLE  GIN  AND  MACHINE  WORKS 
131  Georgia  Reports  336  (1908) 

EVANS,  P.  J.  The  Van  Winkle  Gin  and  Machine  Works,  a  cor- 
poration, brought  this  action  against  the  Atlanta  Lodge  No.  i,  of  the 
International  Association  of  Machinists,  an  unincorporated  body,  and 
certain  members  thereof,  who  had  lately  been  in  the  employment  of 
the  plaintiff,  but  who  were  on  a  strike,  to  enjoin  them  from  picketing, 
intimidating,  and  otherwise  interfering  with  the  plaintiff's  employees 
and  business.  The  defendants  showed  cause  against  the  grant  of  an 
injunction,  both  by  demurrer  and  answer.  After  hearing  evidence 
the  defendants  were  "enjoined  from  placing  themselves,  their  agents, 
or  confederates,  near  the  approaches  to  the  petitioner's  premises 
described  in  the  petition  and  adjoining  thereto,  to  induce  persons 
working  for  petitioner  not  to  work  for  it,  and  persons  seeking  employ- 
ment by  petitioner  not  to  enter  petitioner's  employment,  by  threats 
of  violence,  intimidation,  or  persuasion,  until  the  further  order  of  the 
court."  Exception  is  taken  to  the  judgment  in  its  entirety,  and 
especially  to  so  much  thereof  as  forbids  the  defendants  from  placing 
themselves  in  or  near  the  premises  of  the  plaintiff  for  the  purpose  of 
persuading  persons  not  to  enter  the  plaintiff's  employment,  or  to 
quit  the  same,  so  long  as  the  entrances  to  the  plaintiff's  premises  were 
not  obstructed,  and  so  long  as  violence,  force,  and  intimidation  were 
not  used.  The  points  raised  by  the  demurrer  were  not  argued  in 
the  brief,  but  only  the  legality  of  the  decree  and  the  sufficiency  of 
the  evidence  to  support  it. 

The  lawfulness  or  unlawfulness  of  " picketing"  has  been  the 
subject-matter  of  discussion  in  a  large  number  of  cases  in  this  country. 
In  the  absence  of  statutes,  courts  have  drawn  from  the  elemental 
principles  of  the  common  law  certain  standards  by  which  this  modern 
factor  used  by  labor  unions  as  a  means  of  settling  controversies 
between  employer  and  employees  must  be  regulated.  Every  indi- 
vidual has  a  natural  right  to  pursue  a  lawful  occupation,  and  to 
conduct  his  business  according  to  his  own  plans  and  policies,  where 
he  does  not  offend  the  law,  or  unlawfully  infringe  upon  the  rights  of 
others.  It  is  the  right  of  every  person  or  corporation  to  hire  and 
discharge  men  at  pleasure,  subject  to  liability  for  damages  for  breach 
of  contract;  and  every  man  has  the  right  to  work  for  another  or  to 
quit  his  service  at  his  pleasure,  subject  to  the  same  liability.  But 
no  person  or  association  of  persons  has  the  right  to  interfere  with  the 


COMPETITIVE  LABOR  PRACTICES  237 

business  of  another  by  means  of  force,  menaces,  or  intimidation,  so 
as  to  prevent  others  from  entering  into  or  remaining  in  the  employ- 
ment of  his  service.  In  California  it  was  held  that  a  merchant  is 
entitled  to  an  injunction  against  the  maintaining  in  front  of  his  place 
of  business  by  a  labor  union,  of  pickets  bearing  placards  which  tend 
to  intimidate  his  employees  and  patrons,  with  intent  to  do  so,  for 
the  purpose  of  compelling  him  to  pay  the  prices  fixed  by  the  union  to 
his  union  employees.  Goldberg  v.  Stablemen's  Union,  149  Cal.  429 
(8  L.R.A.  [N.S.]  460,  117  Am.  St.  R.  145, 86  Pac.  805).  In  American 
Steel  &•  Wire  Co.  v.  Wire  Drawers  &*  Die  Makers  Unions,  90  Fed. 
608,  it  appeared  that  the  unions  massed  large  bodies  around  the  prem- 
ises in  which  a  strike  was  in  progress;  and  the  defendants  were  re- 
strained from  collecting  in  and  about  the  approaches  to  the  complaint's 
mills  for  the  purpose  of  picketing,  or  patroling  or  guarding  the  streets, 
approaches,  and  gates,  for  the  purpose  of  intimidating,  threatening, 
or  coercing  any  of  the  employees,  or  any  persons  seeking  the  employ- 
ment of  complainant.  Other  cases  similar  in  principle  might  be 
added.  But  these  are  sufficient  to  illustrate  our  point,  which  is  that 
when  strikers  patrol  the  streets  and  the  approaches  of  the  premises 
where  the  strike  is  in  progress,  and  their  number  is  so  great,  or  the 
conduct  is  such  as  to  intimidate  and  coerce  the  employees  into 
quitting  their  employment,  or  others  from  seeking  employment,  they 
are  guilty  of  unlawful  acts,  and  will  be  enjoined  from  a  continuance  of 
them.  Sometimes  the  number  of  strikers  engaged  in  the  patrol  may 
be  so  great  that  those  intended  to  be  affected  by  the  demonstration 
will  be  intimidated  by  the  number  of  the  strikers  or  their  sympathizers  t 
without  special  overt  acts.  The  courts  have  repeatedly  held  that  the 
assembling  of  strikers  around  the  establishment  of  the  employer  in 
such  numbers  as  will  serve  as  a  menace  to  those  employed,  or  the 
keeping  of  patrols  in  front  of  or  about  the  premises  of  the  employer, 
accompanied  by  violence  or  any  manner  of  coercion  to  prevent  others 
from  entering  into  or  remaining  in  his  service,  will  be  enjoined. 
24  Cyc.  835,  and  the  numerous  cases  cited  in  the  note  to  the  text. 

While  there  is  some  reference  in  the  evidence  to  the  pickets  of 
the  strikers  having  spoken  to  some  employees,  the  pleadings  and 
evidence  do  not  make  a  distinct  issue  of  a  combination  to  injure  one 
in  his  business  or  trade  by  inducing  by  persuasion  his  employees  to 
violate  existing  contracts  of  employment,  to  the  irreparable  damage 
of  the  employer,  so  as  to  require  a  discussion  of  such  a  claim  as  a 
basis  for  injunction,  or  a  decision  in  regard  to  it. 


238  LAW  AND  BUSINESS 

As  already  said,  members  of  a  labor  union,  either  individually 
or  as  an  association,  have  no  right  by  force,  menace,  or  intimidation, 
to  prevent  others  from  working  upon  such  terms  as  they  are  willing 
to  accept,  or  to  hinder  by  such  means  any  person  from  employing 
laborers.  In  many  cases  it  may  be  difficult  to  draw  the  line  of 
demarcation  between  intimidation  and  inoffensive  persuasion.  In  a 
New  York  case  (Rogers  v.  Evarts,  17  N.Y.  Supp.  264),  it  was  said: 

It  may  be  impossible  to  lay  down  a  general  rule  as  to  what  surrounding 
circumstances  will  characterize  persuasion  and  entreaty  as  intimidation. 
Each  case  must  probably  depend  upon  its  own  surroundings.  But  where 
evidence  presents  such  a  case  as  to  convince  the  court  that  the  employees 
are  being  induced  to  leave  the  employer,  by  operation  upon  their  fears 
rather  than  upon  their  judgments  or  their  sympathy,  the  court  will  be  quick 
to  lend  its  strong  arm  to  his  protection.  Rights  guaranteed  by  law  will 
be  enforced  by  the  court,  whether  invoked  by  employer  or  employee. 

The  very  word  "picket"  is  borrowed  from  the  nomenclature  of  war- 
fare, and  is  strongly  suggestive  of  a  hostile  attitude  toward  the 
individual  or  corporation  against  whom  the  labor  union  has  a  griev- 
ance. To  quote  Mr.  Eddy,  "It  is  conceivable,  however,  that  a 
picket  entirely  lawful  might  be  established  about  a  factory,  but  such  a 
picket  would  go  no  further  than  interviews  and  lawful  persuasion  and 
inducement.  The  slightest  evidence  of  threats,  violence,  or  intimida- 
tion of  any  character  ought  to  be  sufficient  to  convince  court  and  jury 
of  the  unlawful  character  of  the  picket,  since  the  picket  under  the 
most  favorable  consideration  means  an  interference  between  employer 
seeking  employees  and  men  seeking  employment."  i  Eddy  on 
Combinations,  section  339.  But  the  law  does  not  forbid  employees 
who  have  quit  their  employer  from  using  legitimate  argument  to 
induce  others  to  refrain  from  taking  their  places.  The  current  of 
authority  is  that  a  court  of  equity  will  not  enjoin  employees  who  have 
quit  the  service  of  their  employer  from  attempting  to  persuade,  by 
proper  argument,  others  from  taking  their  places,  so  long  as  they  do 
not  resort  to  intimidation  or  obstruct  the  public  thoroughfares. 

There  is  evidence  before  the  judge  that  certain  machinists  in  the 
employment  of  the  E.  Van  Winkle  Gin  &  Machine  Works  became 
dissatisfied  and  quit  their  employment.  These  machinists  were 
members  of  Atlanta  Lodge  No.  i  of  the  International  Association  of 
Machinists.  The  appointed  agent  of  the  local  lodge,  acting  for  and 
in  behalf  of  the  strikers,  demanded  of  the  E.  Van  Winkle  Gin  & 
Machine  Works  that  it  adopt  certain  rules  for  the  conduct  of  its 


COMPETITIVE  LABOR  PRACTICES  239 

business,  which  demand  was  refused.     For  the  purpose  of  enforcing 
their  demand,  and  to  the  end  that  the  former  employer  might  not 
engage  men  to  supply  their  places,  the  strikers  placed  men  at  every 
approach  to  the  plant  of  the  plaintiff  and  the  railway  stations  in  the 
city  of  Atlanta.     There  were  from  four  to  twelve  men  doing  "picket 
duty."     These  pickets  accosted    every    stranger   who    evinced    an 
intention  to  enter  the  manufacturing  plant  of  the  plaintiff,  for  the 
purpose  of  inducing  him  to  abandon  any  intent  to  seek  employment 
with  the  Van  Winkle  Works.    One  of  the  pickets  suggested  to  a  new 
man  that  "while  living  and  doing  well  they  had  better  stay  out." 
At  another  time  the  pickets  after  endeavoring  to  induce  a  man  seek- 
ing employment  to  desist,  upon  his  seeming  reluctance  to  yield  to 
their  entreaties,  said  to  him:   "God  damn  you,  you  will  have  to  get 
out,  anyway."    On  another  occasion  a  man  seeking  employment 
approached  an  employee  of  the  plaintiff  and  asked  to  be  directed  to 
the    plaintiff's    shops.    This   employee   volunteered    to   guide    the 
inquirer,  when  one  of  the  strikers  who  was  near  by  came  up  and 
asked  the  person  seeking  employment  if  he  was  a  machinist,  and 
upon  being  informed  that  he  was  a  machinist  looking  for  a  job,  the 
striker  began  to  abuse  the  shop,  saying  it  was  a  scab  shop  and  to 
curse  the  new  men  who  haol  gone  into  the  shops  to  take  the  places 
of  the  strikers,  calling  them  "damned  scabs."    This  man  did  not 
apply  for  a  job.    These,  and  similar  threats,  and  the  constant  surveil- 
lance of  the  plant  by  the  pickets  caused  other  departments  of  the 
plaintiff's  plant  to  shut  down  for  lack  of  machinists.    At  this  juncture 
of  affairs  the  defendants  were  restrained  by  a  temporary  order  from 
interference  with  the  plaintiff's  business;  and  after  the  grant  of  the 
restraining  order,  according  to  the  testimony  of  the  superintendent 
"everything  has  assumed  a  different  attitude  and  a  feeling  of  rest 
and  confidence  has  taken  place  which  did  not  exist  while  the  premises 
were  picketed."    The  quoted  remarks  of  the  strikers  to  the  men 
who  were  seeking  work  were  more  than  a  peaceable  and  argumenta- 
tive presentation  of  their  grievance.    The  language  of  these  pickets 
was  clearly  intimidative,  and  intended  to  coerce  compliance  with 
their  request  not  to  work  for  the  plaintiff;   and  there  was  no  error 
in  enjoining  such  conduct.  <  The  form  of  the  injunction  is  perhaps  too 
broad,  in  that  the  strikers  are  enjoined  from  using  all  form  of  persua- 
sion.   As  we  have  pointed  out,  it  was  not  unlawful  for  the  strikers  to 
use  legitimate  argument  and  moral  suasion  in  presenting  their  case  to 
those  who  offered  to  take  their  places,  so  long  as  it  is  neither  coercive 


240  LAW  AND  BUSINESS 

nor  intimidating  in  character.  In  affirming  the  judgment,  direction 
is  given  to  so  amend  the  decree  as  to  make  it  accord  with  the  opinion 
of  the  court  in  this  particular. 

Judgment  affirmed. 

QUESTIONS 

1.  D  et  al.,  some  two  hundred  in  number,  leave  P's  employment  because 
of  P's  refusal  to  accede  to  their  demands  for  a  shorter  working  day. 
Having  nothing  else  to  do,  they  loiter  about  P's  place  of  business  and 
make  slighting  remarks  to  employees  and  prospective  employees.     To 
what  relief,  if  any,  is  P  entitled  ? 

2.  D  et  al.  congregate  about  P's  premises  for  the  purpose  of  dissuading 
prospective  employees  from  accepting  employment  from  P.    To  what 
relief,  if  any,  is  P  entitled  ? 

3.  D  et  al.  appoint  two  of  their  members  to  picket  P's  premises  for 
the  purpose  of  inducing  P's  employees  to  leave  him  and  to  dissuade 
others  from  accepting  employment  from  P.    To  what  relief,  if  any,  is 
P  entitled  ? 

4.  The  two  representatives  distribute  handbills,  containing  a  fair  state- 
ment of  their  side  of  controversy,  among  P's  employees  and  prospective 
employees.    To  what  relief,  if  any,  is  P  entitled  ? 

5.  The  representatives  walk  up  and  down  in  front  of  P's  place  of  business 
wearing  this  sign:    "This  place  is  unfair  to  organized  labor;    do  not 
accept  employment  in  it."    To  what  relief,  if  any,  is  P  entitled  ? 

6.  They  quietly  but  firmly  warn  prospective  employees  that  it  will  be  best 
for  them  to  seek  employment  elsewhere.    To  what  relief,  if  any,  is  P 
entitled  ? 

7.  Some  courts  have  said  that  there  can  be  no  such  thing  as  peaceful  picket- 
ing.   Is  there  any  justification  for  such  a  view  ? 

WILLCUTT  &  SONS  COMPANY  v.  DRISCOLL 

200  Massachusetts  Reports  no  (1908) 

HAMMOND,  J.  This  bill,  although  originally  brought  against  two 
unincorporated  associations  or  labor  unions  by  name,  has  now  been 
amended,  so  that  it  runs  only  against  certain  individuals  as  officers  and 
members  of  these  associations  and  against  the  other  members  of  those 
associations  as  represented  by  these  individuals.  No  question  is  made 
that  the  defendants  do  not  sufficiently  represent  all  the  members  of 
both  unions;  and  the  bill  is  not  open  to  objection  upon  this  ground. 
Pickett  v.  Walsh,  192  Mass.  572,  589,  590,  and  cases  there  cited. 

The  questions  before  us  are  raised  upon  a  report  of  the  facts  found 
by  the  judge  of  the  Superior  Court  who  heard  the  case.  They  grew 


COMPETITIVE  LABOR  PRACTICES  241 

out  of  a  trade  dispute  between  the  plaintiff  and  the  members  of  the 
unions  who  were  in  its  employ.  In  April,  1906,  these  unions  adopted 
a  code  of  working  rules,  in  which,  beside  some  minor  demands  not 
now  material,  they  demanded  that  wages  be  increased  five  cents  an 
hour,  that  all  foremen  should  be  members  of  the  unions,  that  the 
business  agent  of  the  unions  should  be  allowed  to  visit  any  building 
under  construction  to  attend  to  his  official  duties,  and  that  wages 
should  be  paid  during  working  hours.  The  plaintiff  declined  to  accept 
these  rules,  and  a  strike  followed. 

By  the  constitution  and  rules  of  the  unions  it  appeared  that  a 
code  of  fines  and  penalties  was  established  by  the  International 
Union,  an  association  composed  of  these  and  other  similar  unions 
throughout  the  country,  and  that  this  code  was  being  actively 
enforced  by  the  local  unions.  One  rule  provided  that  any  member 
violating  any  section  of  the  working  code  should  be  fined  upon  con- 
viction not  less  than  five  nor  more  than  twenty-five  dollars,  one  of 
these  sections  being  that  "No  member  of  the  union  shall  work  with 
a  non-union  man  who  refuses  to  join  the  union."  Various  other 
penalties  were  provided,  varying  from  five  to  five  hundred  dollars  for 
each  offense,  to  be  imposed  upon  persons  designated  as  "common 
scab,"  "inveterate  or  notorious  scabs,"  and  "union  wreckers,"  these 
terms  being  applied  to  those  who  in  different  ways  persisted  in  work- 
ing after  a  strike  has  been  called.  These  fines  in  their  operation  are 
likely  to  be  coercive  in  their  nature. 

This  code  was  actively  enforced  by  the  unions,  and  most  of  the 
members  of  the  unions  who  left  their  work  did  so  through  fear  of  the 
fines  that  would  be  imposed  upon  them  if  they  continued  to  work. 
The  defendants,  Driscoll  and  Reagan,  on  one  occasion  found  two  men 
at  work  for  the  plaintiff,  one  a  journeyman  who  had  been,  and  the 
other  a  foreman  who  then  was,  a  member  of  the  union.  Reagan 
threatened  the  journeyman  with  a  fine  of  $100  if  he  continued  to  work, 
and  Driscoll  notified  the  foreman  that  he  was  called  out.  Both 
refused  to  leave.  Driscoll  reported  the  fact  at  a  meeting  of  the 
union  and  a  vote  was  passed  that  charges  be  preferred  against  the 
men  for  working  contrary  to  the  rules.  A  preliminary  injunction  was 
issued  in  this  case,  and  no  further  steps  were  taken  under  the  vote. 

We  are  of  opinion  that  this  strike  must  be  regarded  as  simply  a 
strike  for  higher  wages  and  a  shorter  day.  It  was  not  a  mere  sympa- 
thetic strike  as  in  Pickett  v.  Walsh,  192  Mass.  572,  or  one  whose 
immediate  object  was  only  remotely  connected  with  the  ultimate 


242  LAW  AND  BUSINESS 

object  of  the  strikers,  as  in  Plant  v.  Woods,  176  Mass.  492.  It  was  a 
direct  strike  by  the  defendants  against  the  other  party  to  the  dispute, 
instituted  for  the  protection  and  furtherance  of  the  interests  of  the 
defendants  in  matters  in  which  both  parties  were  directly  interested 
and  as  to  which  each  party  had  the  right,  within  all  lawful  limits,  to 
determine  its  own  course.  Such  a  strike  must  be  treated  as  a  justifi- 
able strike  so  far  as  respects  its  ultimate  object. 

But  however  justifiable  or  even  laudable  may  be  the  ultimate 
objects  of  a  strike,  unlawful  means  must  not  be  employed  in  carrying 
it  on;  and  it  is  contended  by  the  plaintiff  that  the  use  of  fines  and 
threats  of  fines,  under  circumstances  disclosed  in  the  record,  are 
unlawful.  The  question  is  stated  by  the  trial  judge  in  the  following 
language:  "In  case  of  a  justifiable  strike,  has  the  contractor  the 
right  to  invoke  the  aid  of  the  court  to  prevent  the  labor  union  from 
imposing  a  fine  (which  the  court  has  found  to  be  coercive  in  its  nature) 
or  taking  action  to  impose  one  upon  one  or  more  of  its  members  under 
its  rules  to  induce  them  to  leave  the  contractor's  employ  to  his 
injury?"  Under  the  findings  of  the  judge  it  would  seem  that  the 
question  is  not  intended  to  be  quite  so  broad  as  otherwise  might  be 
inferred  from  its  language.  The  language  is  broad  enough  to  include 
the  case  where  the  employee  is  under  a  contract  to  stay  with  his 
employer  and  where  to  leave  would  be  a  violation,  of  that  contract. 
But  no  such  state  of  things  appears  upon  the  record.  The  plaintiff 
"hired  its  masons  by  the  day  andj^aid^them  on  the  basis  of  the  number 
of  hours  worked,  and  it  might  have  discharged  them  and  they  might 
have  left  at  the  close  of  any  day."  The  question  must  therefore  be 
considered  as  applying  only  to  cases  where  the  employee  by  leaving 
violates  no  contractual  right  of  the  employer. 

The.  question  how  far  the  imposition  of  fines  by  an  organization 
upon  its  members  where  the  effect  is  to  injure  a  third  party  is  justi- 
fiable, was  considered  by  this  court  in  Martell  v.  White ,  185  Mass. 
285;  and  it  was  there  adjudged  that  the  imposition  of  such  a  fine 
by  which  members  of  the  organization  were  coerced  into  refusing  to 
trade  with  the  plaintiff,  not  a  member,  to  his  great  damage,  was 
inconsistent  with  the  ground  upon  which  the  right  to  competition  in 
trade  is  based,  and  as  against  him  was  not  justifiable.  In  the  course 
of  the  opinion  the  case  of  Boutwell  v.  Marr,fli  Vt.  i,  was  cited  in 
which  the  same  conclusion  was  reached.  In  Martell  v.  White  five 
justices  sat,  and  four  of  them,  being  a  majority  of  the  whole  court, 
concurred  in  the  ground  upon  which  it  was  decided.  The  case  was 


COMPETITIVE  LABOR  PRACTICES  243 

carefully  presented  by  counsel,  the  questions  involved  were  regarded 
as  important,  and  there  was  a  difference  of  opinion  among  the  judges 
who  sat  in  it.  It  was  therefore  considered  at  great  length,  and  the 
conclusion  was  reached  after  a  most  exhaustive  discussion  and  the 
most  careful  deliberation.  It  stands  as  a  solemn  adjudication  by  this 
court  after  such  discussion  and  deliberation.  So  far  as  respects  the 
trend  of  judicial  opinion  and  authority  there  has  been  no  change 
since  the  decision  was  announced  unfavorable  to  it  or  to  the  ground 
upon  which  it  was  reached.  On  the  contrary,  so  far  as  we  are  aware, 
whenever  the  case  has  been  mentioned  by  members  of  the  profession, 
whether  they  be  judges  engaged  in  the  practical  administration  of  the 
law,  or  professors  teaching  the  students  of  our  schools  the  true  theory 
of  legal  principles,  it  has  been  received  with  favorable  comment. 
See  Brennan  v.  Hatters  of  North  America,  44  Vroom,  729;  Allis- 
Chalmers  Co.  v.  Iron  Moulders1  Union  No.  125,  150  Fed.  Rep.  155; 
20  Harvard  Law  Review,  355,  356;  17  Green  Bag.  210.  There  is 
every  reason  why  the  doctrine  of  stare  decisis  should  apply,  and,  so 
far  at  least  as  respects  this  Commonwealth,  the  case  must  be  held 
as  settling  the  correctness  of  the  principle  upon  which  the  decision 
was  based. 

What  is  the  complaint  of  the  plaintiff?  It  is  a  corporation 
engaged  in  the  construction  of  buildings  and  employing  a  number 
of  men.  Its  men  left  its  employ  on  a  strike.  To  keep  them  away 
the  defendants  threatened  with  fines  such  as  were  members  of  the 
union,  and  by  that  means  kept  them  away  from  the  plaintiff  when 
otherwise  they  would  have  stayed — all  to  the  great  damage  of  the 
plaintiff.  Shortly  stated  the  case  is  this:  The  plantiff's  men  are 
being  coerced  by  threats  of  a  fine  to  leave  its  employ,  greatly  to  its 
injury,  the  fines  to  be  levied  in  accordance  with  the  by-laws  of  a 
voluntary  association  of  which  the  proposed  victims  are  members. 
This  injury  to  the  plaintiff  is  intended  by  the  defendants.  Has  the 
plaintiff  any  standing  in  equity  to  an  injunction  against  the  infliction 
of  such  injury  ? 

It  is  to  be  premised  that  the  right  which  the  plaintiff  seeks  to 
have  protected  against  the  acts  of  the  defendants  arises  from  no 
contract  or  statute,  but  out  of  the  nature  of  things.  It  is  one  of  the 
large  body  rights  which  have  the  foundation  in  the  fitting  necessities 
of  civilized^society.  It  is  the  common  law  right  to  a  reasonably 
free  labor  market.  VICE-CHANCELLOR  STEVENSON,  in  speaking  of 
it,  says  it  has  been  called  a  "probable  expectancy,"  and  describes  it 


244  LAW  AND  BUSINESS 

as  "the  right  which  every  man  has  to  earn  his  living  or  pursue  his 
trade  without  undue  interference."  Jersey  City  Printing  Co.  v. 
Cassidy,  18  Dick.  759.  He  further  remarks  (pp.  765,  766):  "It  will 
probably  be  found  that  the  natural  expectancy  of  employers  in  rela- 
tion to  the  labor  market  and  the  natural  expectancy  of  merchants  in 
respect  to  the  merchandise  market  must  be  recognized  to  the  same 
extent  by  courts  of  law  and  courts  of  equity  and  protected  by  sub- 
stantially the  same  rules.  It  is  freedom  in  the  market,  freedom  in 
the  purchase  and  sale  of  all  things,  including  both  goods  and  labor, 
that  our  modern  law  is  endeavoring  to  insure  to  every  dealer  on  either 
side  of  the  market."  And  in  Atkins  v.  Fletcher  Co.,  20  Dick.  658, 
664,  the  same  judge  says:  "The  elemental  right  of  the  employer  of 
labor  which  the  courts  recognize  today  no  doubt  is  the  right  to 
employ,  while  the  corresponding  right  of  the  workman  is  the  right  to 
be  employed.  In  other  words,  the  right  to  buy  labor  and  the  right 
to  sell  labor  are  recognized  by  the  law,  and  their  enjoyment  is  greatly 
impaired  or  destroyed  unless  freedom  in  the  labor  market — freedom 
on  both  sides  of  the  labor  market — is.  maintained.  Each  party  to  a 
contract  for  the  sale  of  labor  is  interested  in  the  freedom  of  the  other 
party  with  respect  to  making  the  contract."  In  the  words  of  LORD 
LINDLEY  in  Quinn  v.  Leathern  (1901)  A.C.  495,  534:  "A  person's 
liberty  or  right  to  deal  with  others  is  nugatory  unless  they  are  at 
liberty  to  deal  with  him  if  they  choose  to  do  so."  This  right  of  the 
employer  is  conclusively  established  by  the  numerous  cases  which  hold 
that  he  may  maintain  an  action  against  those  who  by  intimidation 
prevent  persons  from  entering  into  its  employ.  See  remarks  of  LORD 
HALSBURY  in  Allen  v.  Flood  (1898),  A.C.  i,  71,  72.  In  our  own  reports 
such  a  case  may  be  found  in  Vegelahn  v.  Guntner,  167  Mass.  92.  This 
is  the  right — the  right  to  a  free  labor  market — which  the  plaintiff 
asserts  has  been  invaded  by  the  defendants,  and  for  which  he  seeks 
protection. 

The  defendants  also  have  rights.  They  have  the  right  to  work 
or  not  to  work,  to  sell  their  labor  upon  such  terms  as  they  see  fit  and 
to  combine  for  the  purpose  of  getting  more  pay  or  a  shorter  day. 
And  for  the  purpose  of  strengthening  their  organization  and  making 
it  more  effective  they  have  the  right  to  make  appropriate  by-laws  for 
its  internal  management,  and  for  the  regulation  of  the  conduct  of  its 
members  toward  each  other  in  matters  affecting  the  general  interests 
of  the  body;  and  they  may  enforce  obedience  to  such  by-laws  and 
regulations  by  fines  and  other  suitable  penalties. 


COMPETITIVE  LABOR  PRACTICES  245 

But  not  much  progress  is  made  by  this  general  statement  of  the 
rights  of  the  respective  parties.  We  are  still  only  on  the  skirmish 
line.  In  the  jurisprudence  of  any  civilized  country  there  are  but  few, 
if  any,  absolute  rights — rights  which  bend  to  nothing  and  to  which 
everything  else  must  bend.  The  rights  of  one's  life  would  seem  to 
be  quite  absolute,  but  it  must  yield  to  the  private  right  of  self-defense 
and  to  the  public  right  to  punish  for  crime.  And  so  in  the  case 
before  us,  neither  the  right  of  the  plaintiff  to  a  free  labor  market  nor 
the  right  of  the  union  to  impose  a  fine  upon  its  members  is  absolute. 
Neither  is  to  be  considered  apart  from  the  other,  or  without  reference 
to  any  other  conflicting  right,  whether  public  or  private;  but  each 
must  be  regarded  as  having  in  the  rules  of  human  conduct  its  own 
place  beyond  the  limits  of  which  it  must  not  go. 

Moreover  it  must  be  borne  in  mind  (what  sometimes  seems  to 
be  forgotten  by  the  actors  upon  each  side  of  such  controversies)  that 
the  controversy  is  not  a  warfare  in  the  sense  that  for  the  time  being 
the  usual  rules  of  conduct  are  changed,  as  in  the  case  of  an  actual  war 
between  two  countries  There  is  no  martial  law  in  these  cases,  no 
change  in  the  ordinary  rules  of  society,  but  these  rules  remain  the 
same  as  before,  commanding  what  was  theretofore  right  and  pro- 
hibiting what  was  theretofore  wrong. 

The  right  of  an  employer  to  free  labor  is  subject  to  the  right  of 
the  laborer  to  hamper  him  by  many  expedients  short  of  fraud  or  intimi- 
dation amounting  to  injury  to  the  person  or  property  of  those  who 
desire  to  enter  his  employ,  or  threats  of  such  injury.  For  instance, 
persuasion  not  amounting  to  such  intimidation  is  lawful,  and  perhaps 
the  same  may  be  said  of  social  pressure  even  when  carried  to  the  extent 
of  social  ostracism,  not  including,  however,  any  threat  in  a  business 
point  of  view.  See  Vegelahn  v.  Guntner,  167  Mass.  92;  Jersey  City 
Printing  Co.  v.  Cassidy,  18  Dick.  759,  769;  20  Harvard  Law  Review, 
267.  Social  rights  and  privileges  must  take  care  of  themselves.  The 
law  cannot  prescribe  with  whom  one  shall  shake  hands  or  associate 
as  a  friend. 

So  long  also  as  the  by-laws  of  a  union  relate  to  matters  in  which 
no  one  is  interested  except  the  association  and  its  members,  and  violate 
no  right  of  a  third  party  or  no  rule  of  public  policy,  they  are  valid. 
Fines  may  be  imposed,  for  instance  for  tardiness,  absence,  failure  to 
pay  dues,  or  for  misconduct,  affecting  the  organization  or  any  of  its 
members,  and  for  numerous  other  acts.  It  cannot  be  successfully 
contended,  however,  that  as  against  the  right  of  some  party  other 


246  LAW  AND  BUSINESS 

than  the  association  and  its  members  an  act,  otherwise  a  violation  of 
the  third  party's  rights,  is  any  less  a  violation  because  done  by  some 
member  in  obedience  to  a  by-law.  If  a  member  commits  an  assault 
upon  a  person,  and  is  called  into  court  by  the  Commonwealth  upon  a 
criminal  complaint,  or  in  a  civil  action  by  the  victim,  he  can  find  no 
valid  ground  of  defense  in  the  fact  that  he  committed  the  assault  in 
compliance  with  the  requirements  of  a  contract  with  some  other 
person,  or  in  obedience  to  a  by-law  of  an  association  of  which  he  was 
a  member.  So  a  by-law  providing  that,  upon  an  order  to  strike, 
every  employee  shall  quit  work  even  although  such  an  act  should  be 
in  violation  of  a  contract  then  existing  between  him  and  this  employer 
for  continuous  service,  and  that  for  failure  thus  to  break  his  contract 
the  member  should  be  fined,  doubtless  would  be  declared  invalid. 
And  the  principle  at  the  bottom  of  such  a  decision  is  this,  namely: 
An  interference  with  the  right  of  a  third  party  cannot  be  justified 
upon  the  ground  that  the  intruder  is  acting  in  accordance  with  an 
agreement  between  him  and  some  other  person.  In  a  word,  so  long 
as  a  fine  is  imposed  for  the  guidance  of  members  in  matters  in  which 
outside  parties  have  no  interest,  or  in  which  there  is  no  violation  of 
a  right  of  an  outside  party,  then  no  such  party  can  complain.  But 
when  the  right  of  such  a  party  is  invaded,  it  is  no  defense,  either  to 
the  person  fined  or  to  those  who  have  imposed  the  fine,  that  the 
invasive  act  was  done  in  accordance  with  the  by-laws  of  an 
association. 

In  the  case  before  us,  standing  opposed  to  each  other,  are  these 
two  rights:  the  right  of  the  employer  to  a  free  labor  market,  and  the 
right  of  the  striking  employees  in  their  strife  with  him  to  impair  that 
freedom;  and  the  crucial  question  is,  how  far  can  the  latter  go  ?  On 
which  side  of  the  line  shall  stand  the  matter  of  coercion  by  fines 
imposed  by  a  union  upon  its  members  to  impair  that  freedom  ?  Is 
the  employer's  right  to  a  free  market  subject  to  this  system  of  mutual 
intimidation  and  coercion  by  fines,  or  is  the  right  to  establish  such  a 
system  subject  to  the  right  of  the  employer  to  a  free  market  ?  If  the 
employer's  right  is  not  subject  to  this  method  of  intimidation,  then 
of  course  as  against  him  it  is  unlawful.  If  it  is  subject  to  it,  then  he 
cannot  complain,  no  matter  how  severe  the  blow. 

So  far  as  concerns  the  law  in  this  Commonwealth  at  least,  some 
things  seem  to  be  settled.  It  is  settled  that  the  flow  of  labor  to  the 
employer  cannot  be  obstructed  by  intimidation  or  coercion  produced 
by  means  of  injury  to  person  or  property  or  by  threats  of  such  injury. 


COMPETITIVE  LABOR  PRACTICES  247 

Vegelahn  v.  Guntner,  167  Mass.  92.  In  that  case  ALLEN,  J.,  said: 
"Such  an  act  [picketing  as  a  means  of  intimidation]  is  an  unlawful 
interference  with  the  rights  both  of  employer  and  of  employee." 

An  employer  has  a  right  to  engage  all  persons  who  are  willing  to 
work  for  him  at  such  prices  as  may  be  mutually  agreed  upon;  and 
persons  employed  or  seeking  employment  have  a  corresponding  right 
to  enter  into  or  remain  in  the  employment  of  any  person  or  corpora- 
tion willing  to  employ  them.  These  rights  are  secured  by  the  Con- 
stitution itself.  Commonwealth  v.  Perry,  155  Mass.  117;  People  v. 
Gillson,  109  N.Y.  389;  Bracewlle  Coal  Co.  v.  People,  147  111.  66,  71; 
Ritchie  v.  People,  155  111.  98;  Low  v.  Rees  Printing  Co. ,41  Neb.  127. 
See  also  Sherry  v.  Perkins,  147  Mass.  212.  And  it  is  unnecessary  to 
cite  cases  in  support  of  the  proposition  that  such  is  the  great  weight 
of  authority  elsewhere,  even  though  the  ultimate  object  of  the  strike 
be  legal. 

There  can  be  no  doubt  that  fining  is  one  method  of  injuring  a 
man  in  his  estate,  and  that  a  threat  to  fine  is  a  threat  of  such  an  injury. 
Indeed  this  is  recognized  by  the  decree  made  by  the  trial  court  in 
this  very  case,  so  far  as  it  affects  Reagan,  one  of  the  defendants,  who, 
it  was  found,  had  threatened  with  a  fine  a  man  once  but  not  then  a 
member  of  a  union. 

It  is  urged,  however,  that  although  this  method  of  intimidation 
is  generally  an  invasion  of  the  employer's  right  to  a  free  market 
and  therefore  illegal,  yet  when  the  intimidation  is  exerted  by  a  union 
upon  its  members  in  accordance  with  its  by-laws  in  a  strike  whose 
object  is  legal,  it  is  justifiable  and  legal.  To  this  the  obvious  reply 
is  that  the  rule  of  freedom  to  contract  is  founded  upon  principles  of 
public  policy,  that  each  party  to  a  contract  is  interested  in  the  free- 
dom of  the  other  party,  that  it  can  make  no  difference  to  the  public 
or  to  the  employer  (who  in  the  present  case  is  the  other  party),  that 
the  person  intimidated  is  or  is  not  a  member  of  the  society  intimidat- 
ing. In  either  case  the  injury  is  the  same  and  is  from  the  same  cause, 
namely,  intimidation.  The  workman  is  no  longer  free.  In  Longshore 
Printing  Co.  v.  Howell,  26  Ore.  527,  the  court,  after  speaking  of  the 
general  right  of  labor  unions  to  make  rules,  proceeds  thus:  "It  must 
be  understood,  however,  that  these  associations,  like  other  voluntary 
societ'es,  must  depend  for  their  membership  upon  the  free  and  untram- 
meled  choice  of  each  individual  member.  No  resort  can  be  had  to 
compulsory  methods  of  any  kind  to  increase  or  keep  up  or  maintain 
such  membership.  Nor  is  it  permissible  for  associations  of  this  kind 


24&  LAW  AND  BUSINESS 

to  enforce  the  observance  of  their  laws,  rules,  and  regulations  through 
violence,  threats,  or  intimidation,  or  to  employ  any  methods  that 
would  induce  intimidation  or  deprive  persons  of  perfect  freedom  of 
action." 

If  it  be  said  that  fines  are  not  in  themselves  illegal,  and  that  con- 
sequently their  use  cannot  be  illegal,  the  answer  is  that  when  they  are 
used  as  a  method  of  coercion  and  create  a  kind  of  coercion  inconsistent 
with  the  right  of  a  person  they  are,  as  against  that  person's  right, 
illegal.  If  it  be  said,  as  we  have  heard  it  said,  that  fines  are  innocent 
and  cannot  be  illegal  because  they  are  used  by  all  governments  as  a 
method  of  punishing  criminals,  the  answer  is  that  if  the  principle  is 
true  that,  what  a  government  may  do  to  punish  for  crime,  individuals 
or  societies  may  do  to  enforce  private  rights,  then  it  follows  that  a 
by-law  providing  for  imprisonment  or  even  death  may  be  legal. 

If  it  be  said  that  the  member  fined  may  take  his  choice  either  to 
leave  the  organization  or  abide  by  its  rules  to  which  he  has  before 
assented,  and  that  where  there  is  a  choice  there  can  be  no  coercion, 
the  answer  is  that  in  almost  every  conceivable  case  of  coercion  short  of 
an  actual  overpowering  of  the  physical  forces  of  the  victim  there  is  a 
choice.  The  highwayman,  who  presents  his  cocked  pistol  to  the 
traveler  and  demands  his  purse  under  pain  of  instant  death  in  case 
of  refusal,  offers  his  victim  a  choice.  He  may  either  give  up  his  purse 
and  live,  or  refuse  and  die.  In  Carew  v.  Rutherford,  106  Mass,  i, 
the  victim  had  a  choice  either  to  pay  a  fine  or  take  the  consequences 
of  a  refusal.  And  so  the  member  of  a  labor  union  has  the  choice 
either  to  pay  the  fine  or  leave  the  union.  Is  it  difficult  to  realize  what 
that  choice  is  in  these  days  of  organized  labor  ?  Is  it  too  much  to 
say  that  many  times  it  is  very  difficult,  indeed  practically  impossible, 
for  a  workman  to  get  bread  for  himself  and  his  family  by  working 
at  his  trade  unless  he  is  a  member  of  a  union  ?  It  is  true  he  has  a 
choice  between  paying  his  fine  and  not  paying  it,  but  is  it  not  fre- 
quently a  hard  one  ?  May  not  the  coercion  upon  him  sometimes  be 
most  severe  and  effective  ?  Such  is  not  a  free  choice.  And  a  market 
filled  with  such  men  is  not  a  reasonably  free  market.  In  this  connec- 
tion the  language  of  Boutwell  v.  Marr,  71  Vt.  i,  seems  significant  and 
appropriate:  "The  law  cannot  be  compelled  by  any  initial  agreement 
of  an  associate  member  to  treat  him  as  one  having  no  choice  but  that 
of  the  majority,  nor  as  a  willing  participant  in  whatever  action  may 
be  taken.  The  voluntary  acceptance  of  by-laws  providing  for  the 
imposition  of  coercive  fines  does  not  make  them  legal  and  collectible. 


COMPETITIVE  LABOR  PRACTICES  249 

The  fact  that  the  relations  and  processes  deemed  essential  to  a  recov- 
ery are  brought  within  the  membership  and  proceedings  of  an  organ- 
ized body  cannot  change  the  result.  The  law  sees  in  the  member  of 
an  association  of  this  character  both  the  authors  of  its  coercive  system 
and  the  victims  of  its  unlawful  pressure.  If  this  were  not  so,  men 
could  deprive  their  fellows  of  established  rights,  and  evade  the  duty 
of  compensation  simply  by  working  through  an  association." 

If  it  be  said  that  without  fines  the  same  result  may  be  indirectly 
reached  by  the  organization  by  exercising  two  rights,  namely,  the 
right  to  expel  a  member  and  the  right  to  charge  an  initiation  fee  upon 
his  return,  and  since  the  same  result  may  thus  be  legitimately  reached, 
nobody  is  harmed  if  it  be  reached  by  fine,  the  reply  is  that  if  the 
purpose  of  expulsion  and  the  subsequent  initiation  fee  be  each  a  part 
of  one  and  the  same  transaction,  namely,  the  imposition  of  a  fine,  and 
the  two  acts  are  in  substance  the  procedure  by  which  the  intimidation 
by  fine  is  exercised,  and  such  is  the  intention,  then  there  may  be  a 
strong  reason  for  holding  that  such  a  procedure  is  one  imposing  a 
fine  and  should  be  treated  as  such.  Ordinarily,  however,  each  sepa- 
rate act  should  be  treated  by  itself  and  its  validity  judged  by  itself. 
The  fact  that  separately  and  independently  executed  they  incidentally 
may  have  the  effect  of  a  fine  is  immaterial  on  the  question  of  the  right 
to  fine.  The  fact  that  a  result  may  be  incidentally  reached  in  one  way 
does  not  show  that  the  same  result  may  be  lawfully  reached  in  another 
way. 

In  considering  this  question  we  cannot  lose  sight  of  the  great 
power  of  organization.  It  should  be  taken  into  account  when  one 
is  considering  where  the  line  should  be  drawn  between  the  right  of 
the  employer  to  a  free  market  and  the  right  of  workmen  to  interfere 
with  that  market  by  coercion  through  the  rules  of  a  labor  union.  It 
is  not  universally  true  that  what  one  man  may  do  any  number  of 
men  by  concerted  action  may  do.  In  Pickett  v.  Walsh,  192  Mass. 
572,  LORING,  J.,  after  alluding  to  the  great  increase  of  power  by 
combination,  says:  "The  result  of  this' greater  power  of  coercion  on 
the  part  of  a  combination  of  individuals  is  that  what  is  lawful  for  an 
individual  is  not  the  test  of  what  is  lawful  for  a  combination  of  individ- 
uals; or  to  state  it  in  another  way,  there  are  things  which  it  is  lawful 
for  an  individual  to  do  which  it  is  not  lawful  for  a  combination  of 
individuals  to  do." 

In  view  of  these  considerations  and  of  others  more  fully  set  forth 
in  Martell  v.  White,  which  are  not  here  repeated,  and  in  Boutwell  v. 


250  LAW  AND  BUSINESS 

Marr,  ubi  supra,  a  majority  of  the  court  are  of  opinion  that  the  over- 
whelming sense  of  the  thing  is  that  the  principle  that  the  right  of 
the  employer  is  not  subject  to  coercion  or  intimidation  by  injury  or 
threats  of  injury  to  the  persons  or  property  of  laborers  standing  hi 
the  market  to  meet  him,  should  apply  to  the  coercion  and  intimi- 
dation exerted  by  labor  unions  upon  their  members  by  fines  or  threats 
of  fines.  Any  other  conclusion  is  inconsistent  with  the  existence  of 
a  reasonably  free  labor  market  to  which  both  the  employer  and  the 
employee  are  entitled. 

The  result  is  that  in  the  opinion  of  a  majority  of  the  court,  there 
should  be  a  decree  restraining  and  enjoining  the  defendants,  their 
agents,  and  servants  from  intimidating  by  the  imposition  of  a  fine, 
or  by  a  threat  of  such  fine,  any  person  or  persons  from  entering  into 
the  employ  of  the  plaintiff  or  remaining  therein;  or  from  in  any  way 
being  a  party  or  privy  to  the  imposition  of  any  fine  or  threat  of  such 
imposition  upon  any  person  desiring  to  enter  into  or  remain  in  the 
employ  of  the  plaintiff. 

QUESTIONS 

1.  Why  was  the  conduct  of  the  defendants  held  illegal  in  the  principal 
case? 

2.  P,  normally  employing  union  labor,  employed  X,  a  non-union  man. 
D  and  other  employees  of  P,  members  of  a  union,  voted  to  fine  P  $500 
and  to  enforce  the  fine  by  a  strike  unless  P  discharged  X.    P  discharged 
X.    What  are  the  rights  of  P,  if  any,  under  the  circumstances  ? 

3.  In  the  foregoing  case,  P  paid  the  fine  under  protest.    Later  P  brought 
an  action  to  recover  the  amount  so  paid.    What  decision  ? 

4.  The  D  Union  informs  X  that  he  will  be  expelled  from  the  union  unless 
he  joins  in  a  strike  which  is  to  be  called  in  P's  plant.    X  joins  in  the 
strike,     (a)  What  are  the  rights  of  P  ?     (&)  What  are  the  rights  of  X  ? 

5.  In  the  foregoing  case,  the  union  informs  X  that  if  expelled  he  will  not 
be  readmitted  to  the  union  except  upon  the  payment  of  a  fee  of  $100. 
X  joins  the  strike,     (a)  What  are  the  rights  of  X  ?     (b)  What  are  the 
rights  of  P  ? 

6.  The  striking  employees  cut  6ff  all  social  communications  with  the  non- 
striking  employees  and  thereby  force  the  latter  to  join  the  strike.    What 
are  the  rights,  if  any,  of  P  under  the  curcumstances  ? 

GLAMORGAN  COAL  COMPANY  v.  SOUTH  WALES 
MINERS'  FEDERATION 

Law  Reports  2  King's  Bench  Division  545  (1903) 

The  Glamorgan  Coal  Co.  and  seventy-three  other  plaintiffs, 
owners  of  collieries  in  South  Wales,  brought  this  action  against  the 


COMPETITIVE  LABOR  PRACTICES  251 

South  Wales  Miners'  Federation,  its  trustees  and  officers,  and  a 
number  of  the  members  of  its  executive  council,  claiming  damages 
for  wrongfully  and  maliciously  procuring  and  inducing  workmen 
employed  in  the  plaintiffs'  collieries  to  break  their  contracts  of  employ- 
ment with  the  plaintiffs.  In  the  alternative  the  plaintiffs  sued  the 
defendants  for  wrongfully  and  maliciously  conspiring  together  to  do 
the  acts  complained  of.  In  this  action  the  plaintiffs  asked  for  damages 
and  an  injunction. 

In  November  of  1900,  the  council  of  the  Miners'  Federation,  fear- 
ing that  the  price  of  coal  would  fall  with  the  consequent  reduction  in 
wages,  forbade  all  employees  of  the  plaintiffs  to  work  on  November  9. 
In  pursuance  of  this  vote,  over  one  hundred  thousand  men  took  a 
holiday  and,  as  alleged  by  the  plaintiffs,  broke  their  contracts  of 
service.  Later  on,  at  a  conference  of  the  miners  the  council  was 
authorized  to  declare  a  general  holiday  at  any  time  that  it  should 
see  fit  for  the  purpose  of  keeping  the  price  of  coal  up.  In  pursuance 
of  this  authorization,  on  four  different  occasions  during  October  and 
November  of  1901,  general  holidays  were  decreed  by  the  council 
which  were  obeyed  by  the  men  in  breach  of  their  contracts  of 
employment. 

BIGHAM,  J.,  found  that  the  federation  and  all  of  the  other  defend- 
ants had  acted  honestly  and  without  malice  in  ordering  these  "stop- 
days"  and  had  done  no  more  than  what  they  conceived  to  be  in  the 
best  interests  of  the  men  whom  they  represented.  He  found,  more- 
over, that  they  had  lawful  justification  or  excuse  for  what  they  did 
in  this — that  having  been  solicited  by  the  men  to  advise  and  guide 
them  on  the  questions  of  "stop-days,"  it  was  their  duty  and  their 
right  to  give  the  advice  and  do  what  might  be  necessary  to  see  that 
the  advice  should  be  followed. 

The  court  gave  judgment  for  the  defendants  and  from  this  judg- 
ment the  plaintiffs  prosecuted  the  present  appeal. 

ROMER,  L.  J.  The  law  applicable  to  this  case  is,  I  think,  well 
settled.  I  need  only  refer  to  two  passages  in  which  that  law  is 
shortly  and  comprehensively  stated.  In  Quinn  v.  Leathen  (1901), 
A.C.  495,  at  page  510,  LORD  MACNAGHTEN  said:  "A  violation  of  a 
legal  right  committed  knowingly,  is  a  cause  of  action,  and  it  is  a 
violation  of  legal  right  to  interfere  with  contractual  relations  recog- 
nized by  law  if  there  be  no  sufficient  justification  for  the  interference." 
And  in  the  Mogul  Steamship  Co.  v.  McGregor,  23  Q.B.D.  598,  at  page 
614,  BOWEN,  L.  J.}  included  in  what  is  forbidden  "the  intentional 


252  LAW  AND  BUSINESS 

procurement  of  a  violation  of  individual  rights,  contractual  or  other- 
wise, assuming  always  that  there  is  not  just  cause  for  it."  But 
although,  in  my  judgment,  there  is  no  doubt  as  to  the  law,  yet  I  fully 
recognize  that  considerable  difficulties  may  arise  in  applying  it  to  the 
circumstances  of  any  particular  case.  When  a  person  has  knowingly 
procured  another  to  break  his  contract,  it  may  be  difficult  under  the 
circumstances  to  say  whether  or  not  "there  was  sufficient  justification 
or  just  cause"  for  his  act.  I  think  it  would  be  extremely  difficult, 
even  if  it  were  possible,  to  give  a  complete  and  satisfactory  definition 
of  what  is  "sufficient  justification, "  and  most  attempts  to  do  so  would 
probably  be  mischievous.  I  certainly  shall  not  make  the  attempt. 
In  particular  I  do  not  think  it  necessary  or. useful  to  discuss  the  point 
as  to  how  far  the  question  of  justification  can  be  assimilated  to  the 
question  of  malice  in  cases  of  libel  and  slander.  As  COLLINS,  M.  R., 
said  in  Read  v.  Friendly  Society  of  Operative  Stonemasons:  (1902)  2  K.B. 
732,  "  It  is  not  at  all  necessary  in  this  case  to  embark  upon  the  question 
whether 'without  just  cause'  is  a  complete  equivalent  for  what  was 
meant  in  the  common  law  by  'malice.'  I  am  inclined  to  think  that, 
though  in  many  cases  adequate  as  a  description,  it  is  not  co-extensive 
with  it,  nor  do  I  think  that  in  civil  action  any  more  than  in  criminal  it 
will  be  possible  to  eliminate  motives  from  the  discussion."  I  respect- 
fully agree  with  what  BOWEN,  J.  L.,  said  in  the  Mogul  Case  when  con- 
sidering the  difficulty  that  might  arise  whether  there  was  sufficient  jus- 
tification or  not:  "  The  good  sense  of  the  tribunal  which  had  to  decide 
would  have  to  analyze  the  circumstances  and  to  discover  on  which 
side  of  the  line  each  case  fell."  I  will  only  add  that,  in  analyzing  or 
considering  the  circumstances,  I  think  that  regard  might  be  had  to 
the  nature  of  the  contract  broken;  the  position  of  the  parties  to  the 
contract;  the  grounds  for  the  breach;  the  means  employed  to  procure 
the  breach;  the  relation  of  the  person  procuring  the  breach  to  the 
person  who  breaks  the  contract;  and  I  think  also  to  the  object  of  the 
person  in  procuring  the  breach.  But,  though  I  deprecate  the  attempt 
to  define  justification,  I  think  it  right  to  express  my  opinion  on  certain 
points  in  connection  with  breaches  of  contract  procured  where  the 
contract  is  one  of  master  and  servant.  In  my  opinion,  defendant 
sued  for  knowingly  procuring  such  a  breach  is  not  justified  of  necessity 
merely  by  his  showing  that  he  had  no  personal  animus  against  the 
employer,  or  that  it  was  to  the  advantage  or  interest  of  both  the 
defendant  and  the  workman  that  the  contract  should  be  broken.  I 
take  the  following  simple  case  to  illustrate  my  view.  If  A  wants  to 


COMPETITIVE  LABOR  PRACTICES  253 

get  a  specially  good  workman,  who  is  under  contract  with  B,  as  A 
knows,  and  A  gets  the  workman  to  break  his  contract  to  B's  injury  by 
giving  him  higher  wages,  it  would  not,  in  my  opinion,  afford  A  a 
defense  to  an  action  against  him  by  B,  that  he  could  establish  hejiad 
no  personal  animus  against  B,  and  that  it  was  both  to  the  interest  of 
himself  and  of  the  workman  that  the  contract  with  B  should  be 
broken.  I  think  that  the  principle  involved  in  this  simple  case, 
taken  by  me  by  way  of  illustration,  really  governs  the  present  case. 
For  it  is  to  be  remembered  that  what  A  has  to  justify  is  his  action, 
not  as  between  him  and  the  workman,  but  as  regards  the  employer 
B.  And,  if  I  proceed  to  apply  the  law  I  have  stated  to  the  circum- 
stances of  the  present  case,  what  do  I  find  ?  On  the  findings  of  the 
fact  it  is  to  my  mind  clear  that  the  defendants,  the  federation,  procured 
the  men  to  break  their  contracts  with  the  plaintiffs,  so  that  I  need  not 
consider  how  the  question  would  have  stood  if  what  the  federation 
had  done  had  been  merely  to  advise  the  men,  or  if  the  men,  after  tak- 
ing advice,  had  arranged  between  themselves  to  break  their  contracts, 
and  the  federation  had  merely  notified  the  men's  intentions  to  the 
plaintiffs.  The  federation  did  more  than  advise.  They  acted  and 
by  their  agents  actually  procured  the  men  to  leave  their  work  and 
break  their  contracts.  In  short,  it  was  the  federation  who  caused 
the  injury  to  the  plaintiffs.  This  was  practically  admitted  before  us 
by  the  counsel  for  the  federation,  and,  indeed,  such  an  admission  could 
not,  in  my  opinion,  be  avoided,  having  regard  to  the  facts  stated 
by  the  learned  judge  in  his  judgment.  And  it  is  not  disputed  that 
the  federation  acted  as  they  did  knowingly.  So  that  the  only  ques- 
tion which  remains  is  one  of  justification.  Now  the  justification 
urged  is  that  it  was  thought  and  I  will  assume  for  this  purpose  rightly 
thought,  to  be  in  the  interest  of  the  men  that  they  should  leave  their 
work  in  order  to  keep  up  the  price  of  coal  on  which  the  amount  of 
wages  of  the  men  depended.  As  to  this,  I  can  only  say  that  to  my 
mind  the  ground  alleged  affords  no  justification  for  the  conduct 
of  the  federation  toward  the  employers;  for,  as  I  have  already 
porn  ted  out,  the  absence  on  the  part  of  the  federation  of  any  malicious 
intention  to  injure  the  employers  in  itself  affords  no  sufficient  justifica- 
tion. But  it  was  said  that  the  federation  had  a  duty  toward  the 
men  which  justified  them  in  doing  what  they  did.  For  myself  I  can- 
not see  that  they  had  any  duty  which  in  any  way  compelled  them 
to  act,  or  justified  them  in  acting,  as  they  did  toward  the  plaintiffs. 
And  the  fact  that  the  men  and  the  federation,  as  being  interested  in 


254  LAW  AND  BUSINESS 

or  acting  for  the  benefit  of  the  men,  were  both  interested  in  keeping 
up  prices,  and  so  in  breaking  the  contracts  affords  in  itself  no  sufficient 
justification  for  the  action  of  the  federation  as  against  the  plaintiffs 
as  I  have  already  pointed  out.  I  think,  therefore,  that  the  appeal 
must  succeed. 

QUESTIONS 

1.  Would  the  same  decision  have  been  reached  in  this  case  had  the  workers 
not  been  under  contracts  of  service  with  their  employers  ? 

2.  Would  the  same  decision  have  been  reached  if  the  defendants  had  been 
ignorant  of  the  contracts  of  service  between  the  workers  and  their 
employers  ? 

3.  The  court  said  in  this  case  that  the  procurement  of  a  breach  of  contract 
is  actionable  unless  the  person  inducing  the  breach  can  show  a  justifica- 
tion.   What  will  constitute  a  justification  for  knowingly  inducing  a 
breach  of  contract  ? 

4.  X  is  under  a  contract  of  employment  with  P  for  a  period  of  one  year. 
D,  honestly  believing  that  P  is  paying  X  insufficient  wages,  persuades  X 
to  break  his  contract  of  employment  with  P.    P  sues  D  for  damages. 
What  decision  ? 

5.  P,  a  non-union  carpenter,  is  under  a  contract  of  employment  with  X. 
D,  a  union  man  in  X's  employ,  persuades  X  to  discharge  P  so  that  Y, 
a  union  man,  can  get  employment.     P  sues  D  for  damages.    What 
decision  ? 

6.  D  et  a/.,  under  contracts  of  employment  with  P,  strike  for  higher  wages. 
.   D  et  al.  then  attempt  to  persuade  M  et  al.,  also  under  contracts  of  employ- 
ment with  P,  to  join  with  them  in  the  strike.    What  are  the  rights  of 
P  against  D  et  al.  ? 

PARKINSON  COMPANY  v.  BUILDING  TRADES  COUNCIL 

154  California  Reports  581  (1908) 

SLOSS,  J.  What  is  particularly  to  be  borne  in  mind  is  that  we 
are  not  here  concerned  with  a  strike  or  boycott  presenting  any  of  the 
features  of  violence,  either  expressly  or  impliedly  threatened,  to  be 
found  in  so  many  of  the  decided  cases.  There  was  here  no  effort  or 
threat  to  interfere  by  physical  force  with  the  plaintiff  or  its  employees, 
nor  any  intimidation  of  employees  or  customers,  using  the  term 
"intimidation"  as  meaning  an  act  tending  to  inspire  fear  of  violence 
to  person  or  property.  One  may,  to  be  sure,  be  put  in  fear  of  violence 
without  the  use  of  any  word  indicating  an  intent  to  resort  to  force. 
"Picketing,"  as  practiced  in  labor  disputes,  may,  and  perhaps  usually 
does,  constitute  an  intimidation  of  the  employees  and  patrons  of 


COMPETITIVE  LABOR  PRACTICES  255 

the  person  whose  establishment  is  picketed  (Goldberg  v.  Stablemen's 
Union,  149  Cal.  429;  117  Am.  St.  Rep.  145;  86  Pac.  806).  The 
carrying,  near  a  place  of  business,  of  banners  calling  upon  laborers 
to  remain  away  from  such  place,  has  been  treated  as  a  form  of  menace 
directed  against  those  who  might  seek  employment  (Sherry  v.  Perkins, 
147  Mass.  212;  9  Am.  St.  Rep.  689;  17  N.E.  307).  So,  too,  words, 
which  of  themselves,  purport  to  express  merely  a  request,  may  be 
uttered  in  such  manner  and  under  such  circumstances  as  to  convey 
to  the  hearer  a  plain  threat  that  refusal  to  comply  with  the  request 
(or  demand)  will  result  in  physical  harm  to  him.  None  of  these 
considerations  are,  however,  presented  in  this  case. 

Nor  need  we  here  consider  how  far  it  is  unlawful,  whether  by 
persuasion  or  other  means,  to  induce  one  of  the  parties  to  a  contract 
to  break  it  to  the  damage  of  the  other.  As  is  pointed  out  in  the 
opinion  of  the  chief  justice,  any  acts  of  this  character  that  may  have 
been  committed  by  the  defendants  had  occurred  prior  to  the  com- 
mencement of  the  action,  and  there  was  no  evidence  that  any  further 
interference  in  this  direction  was  to  be  anticipated.  There  was, 
therefore,  no  basis  for  enjoining  such  acts. 

The  real  question  in  the  case  turns  upon  the  activities  of  the 
defendants  exerted  in  two  ways:  (i)  in  ceasing  to  work  for  the  plaintiff 
(striking);  and  (2)  in  notifying  (or  threatening,  if  that  term  be  pre- 
ferred) the  customers  of  plaintiff  that  workmen  affiliated  with  the 
Building  Trades  Council  would  not  work  for  contractors  using 
materials  purchased  of  plaintiff, 

That  workmen  employed  by  the  Parkinson  Company  had  a  right 
to  leave  its  employ  whenever  they  desired,  and  for  any  reason  that 
might  seem  to  them  sufficient,  is  universally  conceded.  Was  it 
unlawful  to  notify  contractors  dealing  with  the  Parkinson  Company 
that  union  men  would  not  continue  to  work  for  them  if  they  purchased 
material  of  said  Parkinson  Company  ?  In  this  inquiry,  I  think  it  is 
important  that  the  defendants  were  merely  acting  in  accordance  with 
a  rule  adopted  before  any  difference  with  the  plaintiff  had  arisen. 
The  opinion  of  the  chief  justice  appears  to  proceed  upon  the  theory 
that,  since  the  defendants  had  bound  themselves  to  act  in  a  certain 
way  in  the  event  of  a  controversy  of  this  kind,  was  not  only  proper, 
but  laudable,  for  them  to  notify  contractors  of  their  intended  action 
and  of  the  consequences  which  would  follow  to  contractors  who  should 
continue  to  deal  with  the  plaintiff.  More  than  this,  that  it  was  in 
some  way  incumbent  upon  plaintiff  to  notify  contractors  dealing  with 


256  LAW  AND  BUSINESS 

him  that  a  continuance  of  their  patronage  would  be  likely  to  result 
in  loss  to  them.  I  cannot  agree  to  the  proposition  that  the  rights  of 
the  parties  are  in  any  way  affected  by  such  considerations.  If  the 
defendants'  course  of  conduct  amounted  to  an  unlawful  interference 
with  plaintiff's  rights,  it  was  not  made  lawful  by  the  fact  that  the 
defendants  had  decided,  in  advance,  to  act  in  this  way  whenever  an 
occasion  should  present  itself. 

But  was  their  action  unlawful?  They  had  a  right,  as  has  been 
said,  to  cease  working  for  Parkinson.  They  had  an  equal  right  to 
cease  working  for  any  other  employer.  Upon  what  ground,  then,  is 
it  claimed  that  while  their  refusal  to  work  for  plaintiff  gave  plaintiff 
no  cause  of  complaint,  the  refusal  to  work  for  others  did  give  plaintiff 
a  ground  of  action?  Because,  it  is  said,  they  are  bringing  to  bear 
upon  the  Parkinson  Company,  with  which  they  have  a  controversy, 
the  pressure  of  loss  inflicted  by  third  persons,  not  connected  with  the 
main  dispute,  and  are,  by  holding  over  these  third  persons  the  risk 
of  financial  loss,  compelling  them,  against  their  will,  to  inflict  upon 
Parkinson  the  damage  resulting  from  a  cessation  of  their  patronage. 
This  is  the  argument  commonly  advanced  to  establish  the  illegality 
of  what  has  been  called,  in  much  of  the  recent  -discussion  of  the  sub- 
ject, a  "secondary"  rather  than  a  "primary"  boycott.  I  do  not  see 
that  we  are  helped  to  a  solution  of  the  question  of  the  illegality  of 
the  defendants'  acts  by  looking  into  the  "motive"  or  "intent"  with 
which  they  acted.  Even  if  we  assume,  contrary  to  the  decisions  of 
this  court,  that  an  improper  motive  may,  as  a  general  proposition, 
render  actionable  an  act  otherwise  lawful  or  to  use  another  form  of 
statement,  that  damage  intentionally  inflicted  will  be  actionable  unless 
its  infliction  can  be  justified  by  showing  that  it  was  inspired  by  a 
proper  motive,  the  motive  with  which  these  defendants  acted  was 
not,  in  my  opinion,  one  which  the  law  regards  as  improper.  The 
defendants  were  seeking,  in  all  they  are  shown  to  have  done,  to  secure 
employment  by  the  plaintiff  for  themselves,  to  the  exclusion  of  those 
not  associated  with  them,  and  to  secure  the  employment  upon  terms 
deemed  satisfactory  or  advantageous  to  them.  That  is  the  effort  of 
every  dealer  in  goods,  it  is  the  struggle  of  competition,  and  is  no 
more  to  be  frowned  upon  where  the  subject  of  trade  is  labor  than 
where  it  is  a  specific  commodity.  The  uniting  or  combining  of  a 
number  of  persons  to  accomplish  a  lawful  object  by  lawful  means  will 
not,  per  se,  render  the  conduct  of  the  many  any  more  unlawful  than 
would  be  the  same  conduct  on  the  part  of  any  one  of  them.  As  is 


COMPETITIVE  LABOR  PRACTICES  257 

said  by  Mr.  JUSTICE  HOLMES  in  his  dissenting  opinion  in  Vegelahn  v. 
Guntner,  167  Mass.  92,  108: 

It  is  plain  from  the  slightest  consideration  of  practical  affairs,  or  the 
most  superficial  reading  of  industrial  history,  that  free  competition  means 
combination,  and  that  the  organization  of  the  world,  now  going  on  so  fast, 
means  an  ever  increasing  might  and  scope  of  combination.  One  of  the 
eternal  conflicts  out  of  which  life  is  made  up  is  that  between  the  effort  of 
every  man  to  get  the  most  he  can  for  his  services,  and  that  of  society, 
disguised  under  the  name  of  capital,  to  get  his  services  for  the  least  possible 
return.  Combination  on  the  one  side  is  patent  and  powerful.  Combina- 
tion on  the  other  is  the  necessary  and  desirable  counterpart,  if  the  battle 
is  to  be  carried  on  in  a  fair  and  equal  way. 

The  injunction,  then,  must  rest  upon  the  principle  that  it  is  unlaw- 
ful, in  an  effort  to  compel  A  to  yield  a  legitimate  benefit  to  B,  for  B 
to  demand  that  C  withdraw  his  patronage  from  A,  under  the  penalty 
of  losing  B's  services  or  patronage,  to  which  he  has  no  contract  right. 
That  there  are  many  cases  sustaining  the  affirmative  of  this  proposi- 
tion is  true.  Thomas  v.  Cincinnati,  etc.,  Railway  Co.,  62  Fed.  803; 
Hopkins  v.  Oxley  Stove  Co.,  83  Fed.  912;  Vegelahn  v.  Guntner,  167 
Mass.  92;  Beck  v.  Railway  Teamsters1  Protective  Union,  118  Mich. 
497;  Gray  v.  Building  Trades  Council,  91  Minn.  171;  Barr  v.  Essex 
Trades  Council,  53  NJ.  Eq.  101;  Lucke  v.  Clothing  C.  &  T.A.,  79  Md. 
396;  Jackson  v.  Stanfield,  137  Ind.  592;  Crump  v.  Commonwealth, 
84  Va.  927. 

So  are  there  many  to  the  contrary.  Mogul  Steamship  Co.  v. 
McGregor,  L.R.  (1892)  App.  Cas.  25;  National  Protective  Association 
v.  Cumming,  170  N.Y.  315;  Clemmitt  v.  Watson,  14  Ind.  App.  38; 
Cote  v.  Murphy,  159  Pa.  St.  420;  Macauley  Bros.  v.  Tierney,  19  R.I. 
255;  Bo%n  Manufacturing  Co.  v.  Hollis,  54  Minn.  223;  Payne  v. 
Western,  etc.,  Railroad  Co.,  13  Lea  507;  Heywood  v.  Tillson,  75  Me. 
225;  Raycroft  v.  Tayntor,  68  Vt.  219;  State  v.  Van  Pelt,  136  N.C. 
633;  Lindsay  &  Co.  v.  Montana  Federation  of  Labor,  37  Mont.  264. 

Upon  a  consideration  of  the  authorities  I  think  the  sounder  rule 
is  that  one  who  is  under  no  contract  relation  to  another  may  freely 
and  without  question  withdraw  from  business  relations  with  that 
other.  This  includes  the  right  to  cease  to  deal,  not  only  with  one 
person  but  with  others;  not  only  with  the  individual  who  may  be 
pursuing  a  course  deemed  detrimental  to  another  who  opposes  it,  but 
with  all  who  by  their  patronage  aid  in  the  maintenance  of  the  objec- 
tionable policies.  In  other  words,  if  the  defendants  violated  no  right  of 


258  LAW  AND  BUSINESS 

the  Parkinson  Company  by  refusing  to  work  for  it,  they  violated  none 
by  refusing  to  work  for  contractors  who  used  materials  bought  of  Park- 
inson. Such  refusal,  as  is  shown  in  the  opinion  of  the  chief  justice,  and 
as  is  stated  in  the  testimony  of  plaintiff's  manager  and  principal  wit- 
ness, was  the  "sum  total  of  the  interference"  which  was  practiced  or 
threatened.  An  agreement  by  shipowners,  in  order  to  secure  a  carry- 
ing trade  exclusively  for  themselves,  that  agents  of  members  should 
be  prohibited  upon  pain  of  dismissal  from  acting  in  the  interest  of 
competing  shipowners  (Mogul  Steamship  Co.  v.  McGregor,  L.R. 
[1892]  App.  Cas.  25);  a  combination  of  retailers  binding  the  members 
to  refuse  to  purchase  of  wholesalers  who  should  sell  to  non-members 
of  the  combination  (Bohn  Manufacturing  Co.  v.  Hollis,  54  Minn.  223; 
Macauley  Bros.  v.  Tierney,  19  R.I.  255);  an  agreement  of  contractors 
to  withdraw  their  patronage  from  wholesalers  selling  to  a  contractor 
who  had  conceded  the  demands  of  his  employees  for  an  eight-hour 
day  (Cote  v.  Murphy,  159  Pa.  420);  a  threat  by  a  railroad  company 
to  discharge  any  employee  who  should  deal  with  the  plaintiff  (Payne 
v.  Western,  etc.,  Railroad  Co.,  13  Lea,  507);  a  threat  by  an  employer 
that  he  would  discharge  any  laborer  who  rented  plaintiff's  house 
(Heywood  v.  Tillson,  75  Me.  225),  have  been  held  to  give  no  right  of 
action  to  the  individuals  affected.  The  defendants  in  each  case  were 
held  to  be  acting  within  their  absolute  legal  right  in  entering  or 
refusing  to  enter  into  business  relations  with  persons  to  whom  they 
were  not  bound  by  contract.  I  see  no  reason  why  workmen  have  not 
the  same  absolute  right  to  dispose  of  their  labor  as  they  see  fit.  So 
long  as  they  abstain  from  breach  of  contract,  violence,  duress, 
menace,  fraud,  misrepresentation,  or  other  unlawful  means,  they 
may  lawfully  inflict  such  damage  as  results  from  the  withholding  of 
their  labor  or  patronage.  To  quote  again  from  JUDGE  HOLMES'S 
opinion  in  Vegelahn  v.  Guntner,  167  Mass.  92: 

If  it  be  true  that  workingmen  may  combine  with  a  view  among  other 
tilings,  to  getting  as  much  as  they  can  for  their  labor,  just  as  capital  may 
combine  with  a  view  to  getting  the  greatest  possible  return,  it  must  be  true 
that  when  combined  they  have  the  same  liberty  that  combined  capital  has 
to  support  their  interests  by  argument,  persuasion,  and  the  bestowal  or 
refusal  of  those  advantages  which  they  otherwise  lawfully  control. 

The  terms  "intimidation"  and  "coercion"  so  frequently  used  in 
the  discussion  of  this  question,  seem  to  me  to  have  no  application  to 
such  acts  as  were  here  committed.  One  cannot  be  said  to  be  "intimi- 
dated" or  "coerced"  hi  the  sense  of  unlawful  compulsion,  by  being 
induced  to  forego  business  relations  with  A,  rather  than  lose  the  benefit 
of  more  profitable  relations  with  B.  It  is  equally  beside  the  question 


COMPETITIVE  LABOR  PRACTICES  259 

to  speak  of  "threats,"  where  that  which  is  threatened  is  only  what 
the  party  has  a  legal  right  to  do. 

It  may  be  that  the  combination  of  great  numbers  of  men,  as  of 
great  amounts  of  capital,  has  placed  in  the  hands  of  a  few  persons  an 
immense  power  and  one  which,  in  the  interest  of  the  general  welfare, 
ought  to  be  limited  and  controlled.  But  if  there  be,  in  such  com- 
binations, evils  which  should  be  redressed,  the  remedy  is  to  be  sought, 
as  to  some  extent  it  has  been  sought,  by  legislation.  If  the  conditions 
require  new  laws,  those  laws  should  be  made  by  the  law-making  power, 
not  by  the  courts. 

QUESTIONS 

1.  P's  employees  are  on  a  strike  for  higher  wages.    The  striking  employees 
thereafter  refuse  to  deal  with  P  or  to  use  the  commodity  which  he  sells. 
To  what  relief,  if  any,  is  P  entitled  ? 

2.  (a)  The  employees  appeal  to  all  organized  labor  to  refuse  to  deal  with 
P.     (6)  They  publish  in  newspapers  a  fair  account  of  the  controversy 
and  ask  all  "who  believe  in  fair  play  to  keep  away  from  P's  place  of 
business."     (c)  They  publish  in  newspapers   the   statement  that  P  is 
"unfair  to  organized  labor."     (d)  They  appoint  two  men  to  picket  P's 
place  of  business  and  these  two  men  in  an  orderly  manner  dissuade 
prospective  customers  from  dealing  with  P.     (e)  By  fraud,  defamation, 
force,  and  threats  of  violence,  they  keep  many  prospective  customers 
away  from  P's  place  of  business.    To  what  relief,  if  any,  is  P  entitled 
in  the  foregoing  cases  ? 

3.  P  was  engaged  in  buying  and  selling  building  materials  to  contractors. 
His  employees  went  out  on  a  strike  for  higher  wages.    .The  national 
council  of  workers,  of  which  P's  employees  were  members  (a)  asked  all 
contractors  to  refuse  to  buy  building  materials  from  P,  fjb)  notified 
contractors  that  in  case  they  purchased  materials  from  P  their  employees 
would  be  called  out  on  a  strike,  (c)  called  a  strike  of  employees  of  several 
contractors  who  persisted  in  buying  materials  from  P  after  the  warning. 
To  what  relief,  if  any,  is  P  entitled  in  the  foregoing  cases  ? 

4.  P  was  engaged  in  the  manufacture  of  brewing  machinery  and  equipment. 
P's  employees  were  called  out  on  a  strike  for  higher  wages.     The  national 
trade  council  notified  all  union  members  not  to  drink  beer  brewed  by 
brewers  who  bought  machinery  and  equipment  from   P.     To  what 
relief,  if  any,  is  P  entitled  ? 

5.  P's  employees  were  on  a  strike  for  higher  wages.     P  secured  a  number 
of  strike-breakers  to  take  the  places  of  the  striking  employees.    The 
union  notified  all  shops  and  restaurants  in  the  vicinity  of  P's  place  of 
business  that  the  patronage  of  all  members  would  be  withdrawn  from 
those  who  in  any  way  served  the  strike-breakers.    To  what  relief,  if 
any,  is  P  entitled  ? 


26o  LAW  AND  BUSINESS 

BOYER  v.  WESTERN  UNION  TELEGRAPH  COMPANY 

124  Federal  Reporter  246  (1903) 

ROGERS,  DISTRICT  JUDGE.  The  plaintiffs  named  in  the  bill,  for 
themselves  and  for  others  whom  they  describe  as  the  "remaining 
members  of  Local  Lodge  No.  3,  of  St.  Louis,  of  the  Commercial 
Telegraphers'  Union  of  America,"  filed  this  bill  in  equity  and  ask  for 
an  injunction.  A  careful  examination  of  the  bill  shows  that  the  gist 
of  it  is  this: 

That  the  defendant,  having  become  aware  that  plaintiffs  had  become 
members  of  an  organization  known  as  the  Commercial  Telegraphers'  Union 
of  America,  immediately  discharged  them  without  notice  or  other  cause; 
that  the  defendant,  its  officers,  and  agents  have  unlawfully  combined  and 
confederated  together  to  destroy  the  said  union,  and  intend  discharging 
all  the  members  of  said  union  from  the  service  of  the  defendant,  and  by 
threats,  intimidation,  and  coercion,  and  otherwise,  are  interfering  with 
your  orators  and  with  others  of  their  employees  for  uniting  with  the  Com- 
mercial Telegraphers'  Union  of  America,  and  are  seeking  to  prevent  those 
discharged  from  obtaining  employment  as  telegraph  operators;  that 
defendant  has  established  and  maintained  what  is  commonly  known  as  a 
"blacklist."  It  is  a  list  of  persons  who  have  been  in  their  employ  and  who 
have  been  discharged  by  the  defendant,  on  which  are  placed  from  time  to 
time  the  names  of  persons  incurring  the  displeasure  of  the  defendant  com- 
pany, and  its  officers  and  chief  operators;  and  the  defendant,  by  methods 
which  are  not  fully  known  to  your  orators,  and  which  cannot  be  fully  set 
forth  herein,  prevents  persons  whose  names  are  on  said  blacklist*  from  again 
obtaining  employment  as  telegraph  operators;  that  your  orators'  names 
have  been  placed  on  said  blacklist  solely  because  they  have  become  members 
of  the  Commercial  Telegraphers'  Union  of  America,  and  it  is  the  intention 
of  the  defendant  for  the  same  reason  to  discharge  from  their  employ  and 
place  upon  said  blacklist  the  names  of  several  hundred  other  persons  who 
are  members  of  the  Local  Lodge  No.  3  of  the  Commercial  Telegraphers' 
Union  of  America,  and  thereby  debar  these  your  orators  and  said  other 
persons  from  obtaining  employment  at  their  respective  locations  as  telegraph 
operators,  etc. 

The  first  cause  of  complaint  is  that  plaintiffs  have  been  discharged 
without  notice  from  the  service  of  the  defendant  for  no  other  cause 
than  that  they  joined  that  union.  But  the  answer  to  that  complaint 
is  that  in  a  free  country  like  ours  every  employee,  in  the  absence  of 
contractual  relations  binding  him  to  work  for  his  employer  a  given 
length  of  time,  has  the  legal  right  to  quit  the  service  of  his  employer 
without  notice,  and  either  with  or  without  cause,  at  any  time;  and 


COMPETITIVE  LABOR  PRACTICES  261 

in  the  absence  of  such  contractual  relations  any  employer  may  legally 
discharge  his  employee,  with  or  without  notice,  at  any  time. 

The  second  ground  for  complaint  is  that  defendant,  its  officers, 
and  agents,  have  unlawfully  combined  and  confederated  together  Hx> 
destroy  the  said  union,  and  intend  discharging  all  the  members  of 
said  union  from  the  service  of  the  defendant,  and  by  threats,  intimida- 
tion, and  coercion,  and  otherwise,  are  interfering  with  the  plaintiffs 
and  with  others  of  their  employees  for  uniting  with  the  union,  and 
are  seeking  to  prevent  those  discharged  from  obtaining  employment. 
I  need  not  take  time  to  multiply  authorities  to  show  that  there  is  no 
such  thing  in  law  as  a  conspiracy  to  do  a  lawful  thing.  If  the  last 
allegation  means  anything,  it  is  that  the  defendant,  its  officers,  and 
agents  have  conspired  to  destroy  the  union  by  discharging  all  its 
members  in  its  employ,  and  refusing  to  employ  others,  solely  for  the 
reason  that  they  were  members  of  the  union.  But  it  is  not  unlawful, 
in  the  absence  of  contractual  relations  to  the  contrary,  to  discharge 
them  for  that  or  other  reason,  or  for  no  reason  at  all.  Hence  there 
is  no  such  thing  in  law  as  a  conspiracy  to  do  that,  and  it  matters  not 
whether  you  call  such  an  agreement  a  conspiracy,  a  combination,  or 
a  confederation. 

But  it  is  said  that  the  defendants  "by  threats  of  intimidation  and 
coercion,  and  otherwise,  so  interfered  with  plaintiffs  and  others  of 
its  employees"  because  they  united  with  said  union.  But  it  does  not 
appear  what  the  threats  were,  what  the  intimidation  was,  or  what  the 
coercion  was,  of  which  they  complain.  Such  an  allegation  is  not  one 
of  fact;  it  is  one  of  conclusion.  What  did  the  defendant  threaten  to 
do  ?  Perhaps  it  was  to  discharge  them,  or  perhaps,  if  not  employed 
by  it  already,  not  to  employ  them.  But  such  a  threat  is  not  illegal. 
It  is  not  illegal  to  threaten  to  do  a  lawful  thing.  It  may  be  defendant 
threatened  to  employ  non-union  men,  instead  of  members  of  the 
union;  but  that,  if  true,  is  not  illegal.  The  defendant  had  a  perfect 
right  to  employ  whom  it  pleased,  if  it  could.  How  did  defendant 
intimidate  or  coerce  ?  The  complaint  gives  no  answer.  It  will  not 
be  presumed  that  the  threats,  intimidation,  or  coercion  complained 
of  involved  illegal  acts.  The  law  never  presumes  wrong,  or  crime, 
or  illegality;  it  presumes  always  in  favor  of  right  and  legal  action. 
In  the  absence  of  any  alleged  wrongful  act  or  threat,  it  would  presume 
that  defendant's  interference  was  lawful  and  not  unlawful.  True,  it 
is  alleged  that  defendant,  its  officers,  and  agents  unlawfully  combined 
and  confederated  to  destroy  the  union.  But  what  is  unlawful  is  a 


262  LAW  AND  BUSINESS 

question  of  law;  whether  a  thing  done  is  unlawful  depends  on  what 
is  done  or  threatened  to  be  done.  But  what  the  defendant  company, 
its  officers,  and  agents  combined  or  confederated  to  do  in  order  to 
destroy  the  union  is  the  precise  thing  the  complaint  fails  to  show. 
The  court  must  always  be  able  to  look  at  the  facts  and  say  that  if 
these  facts  are  true  they  are  illegal;  otherwise  there  is  no  ground  for 
invoking  its  protective  agency. 

The  plaintiffs  say  defendant,  its  officers,  and  agents  are  seeking 
to  prevent  those  discharged  from  obtaining  employment  as  teleg- 
raphers. But  how  are  they  seeking  to  do  so;  what  are  they  doing; 
are  they  doing  acts  that  are  unlawful  ?  If  so,  what  are  they  ?  The 
complaint  gives  no  answer.  There  is  no  allegation  in  the  complaint 
that  there  were  any  contractual  relations  between  plaintiffs  and  the 
defendant  company  to  retain  plaintiffs  in  the  service  for  any  given 
period.  But  if  there  were,  then  it  must  be  said  that  it  was  illegal  to 
discharge  them.  Yet  in  that  event  equity  can  give  no  relief;  the 
remedy  is  at  law  for  a  breach  of  contract,  and  each  man  injured  must 
sue  separately,  and  in  his  own  right,  for  damages  sustained.  It  would 
be  intolerable  if  a  man  could  be  compelled  to  retain  in  his  employ 
one  he  does  not  want;  courts  of  equity  exercise  no  such  power  and 
grant  no  such  relief. 

But  it  is  said  that  defendant  maintains  a  blacklist  containing  a 
list  of  names  of  such  persons  as  may  have  incurred  its  displeasure  and 
have  been  discharged  from  its  service,  and  that,  by  methods  not  known 
to  them,  it  prevents  such  discharged  persons  from  getting  employ- 
ment as  telegraph  operators;  that  they  have  blacklisted  people  solely 
because  they  belong  to  the  union,  and  that  they  intend  to  blacklist 
others  for  the  same  reason.  We  have  seen  that  it  is  not  unlawful  to 
discharge  plaintiffs  because  they  belong  to  the  union.  Is  it  unlawful 
for  defendant  to  keep  a  book  showing  that  they  were  discharged  and 
because  they  belonged  to  the  union?  The  union  presumably,  and 
especially  in  view  of  the  allegations  in  the  bill,  is  an  honorable,  repu- 
table, and  useful  organization,  intended  to  better  the  conditions  and 
elevate  the  character  of  its  members.  Is  it  illegal  for  defendant  to 
keep  a  book  showing  that  it  had  discharged  members  of  such  a  union 
solely  because  they  belong  to  it  ?  That  seems  to  be  the  real  essence 
of  the  bill.  Is  it  illegal  to  notify  others  that  it  keeps  such  a  book  and 
that  they  can  inspect  it,  or  to  inform  others  what  such  a  book  shows  ? 
That  seems  to  be  the  ground  of  complaint.  There  can  be  no  question 
about  it;  the  positive,  direct,  and  unequivocal  allegation  is  that 


COMPETITIVE  LABOR  PRACTICES  263 

defendant  keeps  such  a  book;  that  plaintiffs  are  placed  on  it  solely 
because  they  belong  to  the  union.  Can  a  court  of  equity  grant  relief 
to  a  man  who  says  for  his  cause  of  action  that  he  belongs  to  a  repu- 
table organization,  and  that  he  has  been  discharged  solely  because  4ie 
did  belong  to  it;  that  his  employer  who  discharged  him  keeps  a  book 
on  which  is  placed  his  name  solely  because  he  belonged  to  such  organ- 
ization; and  that  he  gives  that  information  to  other  persons,  who 
refuse  to  employ  him  on  that  account?  Suppose  a  man  should  file 
a  bill  allegating  that  he  belonged  to  the  Honorable  and  Ancient  Order 
of  Freemasons,  or  to  the  Presbyterian  church,  or  to  the  Grand  Army 
of  the  Republic;  that  his  employer  had  discharged  him  solely  on  that 
account;  that  he  had  discharged  others  of  his  employees,  and  intended 
to  discharge  all  of  them,  for  the  same  reason;  that  he  kept  a  book 
which  contained  all  the  names  of  such  discharged  persons,  and  set 
opposite  the  name  of  each  discharged  person  the  fact  that  he  had 
been  discharged  solely  on  the  ground  that  he  belonged  to  such  organ- 
ization; and  that  he  had  given  such  information  to  others,  who 
refused  to  employ  such  persons  on  that  account.  Is  it  possible  a 
court  of  equity  could  grant  relief  ?  If  so,  pray,  on  what  ground  ?  And 
yet  that  is  a  perfectly  parallel  case  to  this  as  made  by  the  bill. 

Those  who  may  be  interested  in  the  questions  raised  by  the 
demurrer  to  this  bill  will  be  interested  and  instructed  by  reading  the 
following  cases,  and  especially  the  first:  Payne  v.  Western  &•  Atlantic 
Railroad  Co.,  49  Am.  Rep.  666;  Dina  Worthington  v.  Waring,  157 
Mass.  421;  Hundley  v.  Louisville  &*  Nashville  Railway  Co.,  48  S.W. 
429;  McDonald  v.  Illinois  Central  Railroad,  187  111.  529;  W abash 
Railroad  Co.  v.  Hannahan,  121  Fed.  563. 

The  demurrer  is  sustained  from  want  of  equity  in  the  bill. 

QUESTIONS 

1.  D  employs  P  under  an  arrangement  terminable  at  the  will  of  either 
party.    D  discharges  P  because  the  latter  joins  a  union.    What  decision 
in  an  action  by  P  against  D  for  damages  ? 

2.  D  is  under  a  contract  to  employ  P  for  a  year.    Before  the  end  of  the 
year  D  discharges  P  because  the  latter  joins  a  union.    What  decision 
in  an  action  by  P  against  D  ? 

3.  X,  Y,  Z,  and  others,  shoe  manufacturers,  organize  for  their  common 
protection.    It  is  a  rule  of  the  association  that  each  member  will  furnish 
to  all  other  members  a  list  of  striking  employees  and  it  is  understood 
that  no  member  will  employ  any  worker  whose  name  appears  on  such  a 
list.     P,  a  striking  employee,  is  refused  employment  by  Z  because  of 
this  understanding.    What  are  P's  rights,  if  any,  and  against  whom? 


264  LAW  AND  BUSINESS 

4.  It  is  further  agreed  by  the  members  of  the  association  that  any  member 
who  employs  a  striking  employee  shall  be  expelled  from  the  association 
or  fined  as  the  association  may  decide.     P  is  refused  employment  by 
Y  because  of  the  operation  of  this  rule.    What  are  his  rights,  if  any,  and 
against  whom  ? 

5.  The  association  further  agrees  that  all  members  shall  discharge  any 
employee  who  joins  a  union  after  accepting  employment  and  that  any 
member  who  refuses  to  enforce  this  rule  shall  be  expelled  or  fined.    P  is 
discharged  by  Z  because  of  this  rule.     To  what  relief,  if  any,  is  P  entitled  ? 

6.  X  continues  to  employ  union  labor  notwithstanding  his  expulsion  from 
the  association.     The  association  thereupon  notifies  all  wholesaler  leather 
dealers  that  the  patronage  of  all  members  of  the  association  will  be  with- 
drawn if  they  do  not  cease  selling  materials  to  X.     (a)  To  what  relief, 
if  any,  is  X  entitled  ?     (b)  To  what  relief,  if  any,  is  P,  union  worker  in 
X's  employ,  entitled  ? 

7.  Z's  employees  are  on  a  strike  for  higher  wages,     (a)  The  association  is 
attempting  to  dissuade  merchants  in  the  vicinity  from  selling  goods  to 
striking   employees,     (b)   The   association   threatens   to   withdraw   its 
patronage  from  such  merchants  unless  they  cease  dealing  with  the 
striking  employees.    To  what  relief,  if  any,  are  the  striking  employees 
entitled  ? 

LAWLOR  v.  LOEWE 

235  United  States  Reports  522  (1915) 

The  facts  in  this  case,  which  is  commonly  known  as  the  Danbury 
Hatters'  Case,  involving  the  validity  of  a  verdict  for  damages  resulting 
from  a  combination  and  conspiracy  in  restraint  of  trade  under  sec- 
tion 7  of  the  Anti-trust  Act,  are  stated  in  the  opinion. 

Mr.  ALTON  B.  PARKER,  with  whom  Mr.  FRANK  L.  MULHOLLAND 
was  on  the  brief,  for  plaintiffs  in  error :  Since  the  defendants  in  this 
case,  although  members  of  local  unions  of  hatters  which  were  affiliated 
with  the  national  organization  known  as  the  United  Hatters  of 
North  America,  did  not  participate  in  the  acts  of  the  officers  and 
agents  of  the  national  association  which  are  relied  upon  to  establish 
the  allegation  of  the  complaint,  they  can  be  held  liable  only  on  the 
ground  that  they  had  knowledge  of,  and,  having  knowledge,  acquiesced 
in,  those  acts;  membership  in  a  local  union  and  the  payment  of  dues 
are  not  alone  sufficient  to  make  the  defendants  liable  for  the  unlawful 
acts  of  the  officers  and  agents  of  the  national  association. 

Mr.  WALTER  GORDON  MERRITT  and  Mr.  DANIEL  DAVENPORT  for 
defendants  in  error:  The  charge  of  the  court  to  the  effect  that  the 
individual  defendants,  members  of  the  union,  were  liable  under  the 


COMPETITIVE  LABOR  PRACTICES  265 

Sherman  Anti-trust  Act,  if  they  knew,  or  ought  to  have  known,  or 
were  in  duty  bound  to  know,  that  their  union  and  its  officers  were 
engaged  in  the  conspiracy  to  restrain  the  plaintiffs'  interstate  trade, 
was  under  the  circumstances  of  the  case  correct.  The  defendants 
are  liable  under  the  rule  of  respondeat  superior. 

HOLMES,  J.  This  is  an  action  under  the  act1  of  July  2,  1890, 
c.  647,  sec.  7,  26  Stat.  209,  210,  for  combination  and  conspiracy  in 
restraint  of  commerce  among  the  states,  specifically  directed  against 
the  plaintiffs  (defendants  in  error),  among  others,  and  effectively 
carried  out  with  the  infliction  of  great  damage.  The  declaration  was 
held  good  on  demurrer  in  Loewe  v.  Lawlor,  208  U.S.  274,  where  it 
will  be  found  set  forth  at  length.  The  substance  of  the  charge  is 
that  the  plaintiffs  were  hat  manufacturers  who  employed  non-union 
labor;  that  the  defendants  were  members  of  the  United  Hatters  of 
North  America  and  also  of  the  American  Federation  of  Labor;  that 
in  pursuance  of  a  general  scheme  to  unionize  the  labor  employed  by 
manufacturers  of  fur  hats  (a  purpose  previously  made  effective 
against  all  but  a  few  manufacturers),  the  defendants  and  other 
members  of  the  United  Hatters  caused  the  American  Federation  of 
Labor  to  declare  a  boycott  against  the  plaintiffs  and  against  all  hats 
sold  by  the  plaintiffs  to  dealers  in  other  states  and  against  dealers 
who  should  deal  in  them;  and  that  they  carried  out  their  plan  with 
such  success  that  they  have  restrained  or  destroyed  the  plaintiffs' 
commerce  with  other  states.  The  case  now  has  been  tried,  the 
plaintiffs  have  got  a  verdict  and  the  judgment  of  the  District  Court 
has  been  affirmed  by  the  Circuit  Court  of  Appeals.  209  Fed.  Rep. 
721. 

1  SECTION  i .  Every  contract,  combination  in  the  form  of  trust  or  otherwise,  or 
conspiracy,  in  restraint  of  trade  or  commerce  among  the  several  states,  or  with 
foreign  nations,  is  hereby  declared  to  be  illegal.  Every  person  who  shall  make 
any  such  contract  or  engage  in  any  such  combination  or  conspiracy,  shall  be  deemed 
guilty  of  a  misdemeanor,  and,  on  conviction  thereof,  shall  be  punished  by  fine  not 
exceeding  five  thousand  dollars,  or  by  imprisonment  not  exceeding  one  year,  or 
by  both  said  punishments,  in  the  discretion  of  the  court. 

SEC.  4.  The  several  Circuit  Courts  of  the  United  States  are  hereby  invested 
with  jurisdiction  to  prevent  and  restrain  violations  of  this  act 

SEC.  7.  Any  person  who  shall  be  injured  in  his  business  or  property  by  any 
other  person  or  corporation  by  reason  of  anything  forbidden  or  declared  to  be 
unlawful  by  this  act,  may  sue  therefor  in  any  Circuit  Court  of  the  United  States 
in  the  district  in  which  the  defendant  resides,  or  is  found,  without  respect  to  the 
amount  in  controversy,  and  shall  recover  threefold  the  damages  by  him  sustained, 
and  the  costs  of  suit,  including  a  reasonable  attorney's  fee. 


266  LAW  AND  BUSINESS 

The  grounds  for  discussion  under  the  statute  that  were  not  cut 
away  by  the  decision  upon  the  demurrer  have  been  narrowed  still 
further  since  the  trial  by  the  case  of  Eastern  States  Retail  Lumber 
Dealers1  Association  v.  United  States,  234  U.S.  600.  Whatever  may 
be  the  law  otherwise,  that  case  establishes  that,  irrespective  of  com- 
pulsion or  even  agreement  to  observe  its  intimation,  the  circulation 
of  a  list  of  "unfair  dealers,"  manifestly  intended  to  put  the  ban  upon 
those  whose  names  appear  therein,  among  an  important  body  of 
possible  customers  combined  with  a  view  to  joint  action  and  in  antici- 
pation of  such  reports,  is  within  the  prohibitions  of  the  Sherman  Act 
if  it  is  intended  to  restrain  and  restrains  commerce  among  the  states. 

It  requires  more  than  the  blindness  of  justice  not  to  see  that  many 
branches  of  the  United  Hatters  and  the  Federation  of  Labor,  to  both 
of  which  the  defendants  belonged,  in  pursuance  of  a  plan  emanating 
from  headquarters,  made  use  of  such  lists  and  of  the  primary  and 
secondary  boycott  in  their  effort  to  subdue  the  plaintiffs  to  their 
demands.  The  union  label  was  used  and  a  strike  of  the  plaintiffs' 
employees  was  ordered  and  carried  out  to  the  same  end,  and  the 
purpose  to  break  up  the  plaintiffs'  commerce  affected  the  quality  of 
the  acts.  Loewe  v.  Lawlor,  208  U.S.  274,  299.  We  agree  with  the 
Circuit  Court  of  Appeals  that  a  combination  and  conspiracy  forbidden 
by  the  statute-were  proved,  and  that  the  question  is  narrowed  to  the 
responsibility  of  the  defendants  for  what  was  done  by  the  sanction 
and  procurement  of  the  societies  above  named. 

The  court  in  substance  instructed  the  jury  that  if  these  members 
paid  their  dues  and  continued  to  delegate  authority  to  their  officers 
unlawfully  to  interfere  with  the  plaintiffs'  interstate  commerce  in 
such  circumstances  that  they  knew  or  ought  to  have  known,  and 
such  officers  were  warranted  in  the  belief  that  they  were  acting  in  the 
matters  within  their  delegated  authority,  then  such  members  were 
jointly  liable,  and  no  others.  It  seems  to  us  that  this  instruction 
sufficiently  guarded  the  defendants'  rights,  and  that  the  defendants 
got  all  that  they  were  entitled  to  ask  in  not  being  held  chargeable 
with  knowledge  as  matter  of  law.  It  is  a  tax  on  credulity  to  ask  any- 
one to  believe  that  members  of  labor  unions  at  that  time  did  not  know 
that  the  primary  and  secondary  boycott  and  the  use  of  the  "We  don't 
patronize"  or  "Unfair"  list  were  means  expected  to  be  employed  in 
the  effort  to  unionize  shops.  Very  possibly  they  were  thought  to  be 
lawful.  See  Gompers  v.  United  States,  233  U.S.  604.  By  the  con- 
stitution of  the  United  Hatters  the  directors  are  to  use  "all  the  means 


COMPETITIVE  LABOR  PRACTICES  267 

within  their  power"  to  bring  shops  "not  under  jurisdiction"  "into 
the  trade."  The  by-laws  provide  a  separate  fund  to  be  kept  for 
strikes,  lockouts,  and  agitation  for  the  union  label.  Members  are 
forbidden  to  sell  non-union  hats.  The  Federation  of  Labor jwith 
which  the  Hatters  were  affiliated  had  organization  of  labor  for  one 
of  its  objects,  helped  affiliated  unions  in  trade  disputes,  and  to  that 
end,  before  the  present  trouble,  had  provided  in  its  constitution  for 
prosecuting  and  had  prosecuted  many  what  it  called  legal  boycotts. 
Their  conduct  in  this  and  former  cases  was  made  public  especially 
among  the  members  in  every  possible  way.  If  the  words  of  the 
documents  on  their  face  and  without  explanation  did  not  authorize 
what  was  done,  the  evidence  of  what  was  done  publicly  and  habitually 
showed  their  meaning  and  how  they  were  interpreted.  The  jury  could 
not  but  find  that  by  the  usage  of  the  unions  the  acts  complained  of 
were  authorized,  and  authorized  without  regard  to  their  interference 
with  commerce  among  the  states.  We  think  it  unnecessary  to  repeat 
the  evidence  of  the  publicity  of  this  particular  struggle  in  the  common 
newspapers  and  union  prints,  evidence  that  made  it  almost  inconceiv- 
able that  the  defendants,  all  living  in  the  neighborhood  of  the  plain- 
tiffs, did  not  know  what  was  done  in  the  specific  case.  If  they  did 
not  know  that,  they  were  bound  to  know  the  constitutions  of  their 
societies,  and  at  least  well  might  be  found  to  have  known  how  the 
words  of  those  constitutions  had  been  construed  in  the  act. 

Judgment  affirmed. 

QUESTIONS 

1.  What  was  the  decision  of  the  court  in  Loewe  v.  Lawlor,  208  U.S.  274? 

2.  (a)  D  and  others,  employees  of  P,  organize  for  the  purpose  of  bettering 
their  working  conditions.     (6)  They  leave  P's  employment  in  a  body 
because  P  refuses  to  grant  their  requests  for  an  increase  of  wages,     (c) 
Two  of  their  representatives  peacefully  picket  P's  place  of  business  in 
an  attempt  to  persuade  other  employees  to  join  in  the  strike  and  to 
dissuade  persons  from  accepting  employment  with  P..    Are  D  and  others 
punishable  under  the  Sherman  Act  for  any  of  the  foregoing  acts  ? 

3.  D  and  others  resort  to  force  and  threats  of  violence  to  prevent  other 
persons  from  accepting  employment  with  P.    To  what  relief,  if  any,  is 
P  entitled  under  the  Sherman  Act  ? 

4.  (a)  D  and  others  attempt  by  persuasion  to  prevent  persons  from  dealing 
with  P.     (b)  They  resort  to  force  and  threats  of  violence  to  prevent 
persons  from  dealing  with  P.     (c)   They  circulate  a  list  of  "unfair 
employers"  among  possible  customers   of  P  with  intent  to  prevent 


268  LAW  AND  BUSINESS 

them  from  dealing  with  P.    To  what  relief,  if  any,  is  P  entitled  under 
the  Sherman  Act  in  each  of  the  foregoing  situations  ? 

5.  D  and  others  notify  X  that  his  workers  will  be  called  out  on  a  strike  if 
he  does  not  cease  to  deal  with  P.    To  what  relief,  if  any,  is  P  entitled 
under  the  Sherman  Act  ? 

6.  What  remedy  or  remedies  has  a  person  who  is  being  injured  by  a  com- 
bination or  a  conspiracy  within  the  meaning  of  the  Sherman  Act  ? 

7.  What  persons  were  being  held  liable  for  damages  in  the  principal  case? 
What  justification  is  there  for  holding  all  of  these  defendants  liable  ? 

DUPLEX  PRINTING  COMPANY  v.  DEERING 

254  United  States  Reports  443  (1921) 

This  was  a  suit  in  equity  by  the  complaint  for  an  injunction  to 
restrain  a  course  of  conduct  carried  on  by  the  defendants  in  maintain- 
ing a  boycott  against  the  products  of  the  complainant's  factory,  in 
furtherance  of  an  alleged  conspiracy  to  injure  and  destroy  its  good- 
will, trade,  and  business — especially  to  obstruct  and  destroy  its  inter- 
state trade. 

The  complainant  is  a  Michigan  corporation  and  manufactures 
printing  presses  in  that  state.  It  employs  about  200  machinists  in 
its  factory  and  about  50  office  employees,  traveling  salesmen,  and 
expert  machinists  or  road  men  who  supervise  the  erection  of  the 
presses  for  complainant's  customers  at  their  various  places  of  business. 

The  defendants  are  Emil  J.  Deering  and  William  Bramley,  sued 
individually  and  as  business  agents  of  District  No.  15  of  the  Inter- 
national Association  of  Machinists,  and  Michael  T.  Neyland,  sued 
individua^y  and  as  business  agent  of  Local  Lodge  No.  328  of  the 
same  association. 

The  comp'ainant  conducts  its  business  on  the  "open  shop"  policy. 
The  individual  defendants  and  the  local  organizations  of  which  they 
are  representatives  are  affiliated  with  the  International  Association 
of  Machinists,  an  unincorporated  association  having  a  membership 
of  more  than  60,000;  and  are  united  in  a  combination,  to  which  the 
International  Association  also  is  a  party,  having  the  object  of  forcing 
the  complainant  to  unionize  its  factory  and  enforce  the  "closed 
shop,"  the  eight-hour  day,  and  the  union  scale  of  wages  by  means  of 
interfering  with  and  restraining  its  interstate  trade  in  the  sale  and 
manufacture  of  presses. 

The  defendants,  in  establishing  the  boycott  of  complainant's 
goods,  have  warned  customers  that  it  would  be  better  for  them  not 
to  purchase,  or  having  purchased  not  to  instal,  presses  made  by  com- 


COMPETITIVE  LABOR  PRACTICES  269 

plainant,  and  threatened  them  with  loss  in  case  they  should  do  so; 
threatened  customers  with  sympathetic  strikes  in  other  trades;  noti- 
fied a  trucking  company  usually  employed  by  customers  to  haul  the 
presses  not  to  do  so  and  threatened  it  with  trouble  if  it  should;  incited 
employees  of  the  trucking  company,  and  other  men  employed  by 
customers  of  complainant,  to  strike  against  their  respective  employees 
in  order  to  interfere  with  the  hauling  and  installation  of  presses; 
notified  repair  shops  not  to  make  repairs  on  Duplex  presses;  coerced 
union  men  by  threatening  them  with  loss  of  union  cards  and  with 
being  blacklisted  as  " scabs"  if  they  should  assist  in  installing  the 
presses;  and  resorted  to  a  variety  of  other  modes  of  preventing  the 
sale  of  complainant's  presses  in  and  about  New  York  and  the  delivery 
of  them  in  interstate  commerce,  such  as  injuring  and  threatening  to 
injure  complainant's  customers  and  prospective  customers,  and  per- 
sons concerned  in  hauling,  handling,  or  installing  the  presses. 

The  District  Court,  on  final  hearing,  dismissed  the  bill,  247  Fed. 
Rep.  192;  the  Circuit  Court  of  Appeals  affirmed  its  decree,  252  Fed. 
Rep.  722;  and  the  present  appeal  was  taken. 

PITNEY,  J.  That  complainant's  business  of  manufacturing  print- 
ing presses  and  disposing  of  them  in  commerce  is  a  property  right, 
entitled  to  protection  against  unlawful  injury  or  interference;  that 
unrestrained  access  to  the  channels  of  interstate  commerce  is  necessary 
for  the  successful  conduct  of  the  business;  that  a  widespread  combina- 
tion exists,  to  which  defendants  and  the  associations  represented  by 
them  are  parties,  to  hinder  and  obstruct  complainant's  interstate 
trade  and  commerce  by  the  means  that  have  been  indicated;  and  that 
as  a  result  of  it  complainant  has  sustained  damage  to  its  interstate 
trade,  and  is  threatened  with  further  and  irreparable  loss  and  damage 
in  the  future,  is  proved  by  clear  and  undisputed  evidence.  Hence 
the  right  to  an  injunction  is  clear  if  the  threatened  loss  is  due  to  a 
violation  of  the  Sherman  Act  as  amended  by  the  Clayton  Act. 

Looking  first  to  the  former  act,  the  thing  declared  illegal  by  its 
first  section  is  "Every  contract,  combination  in  the  form  of  trust  or 
otherwise,  or  conspiracy,  in  restraint  of  trade  or  commerce  among 
the  several  states,  or  with  foreign  nations."  The  accepted  definition 
of  a  conspiracy  is,  a  combination  of  two  or  more  persons  by  concerted 
action  to  accomplish  some  purpose  not  in  itself  criminal  or  unlawful 
by  criminal  or  unlawful  means.  Pettibone  v.  United  States,  148  U.S. 
197.  If  the  purpose  be  unlawful  it  may  not  be  carried  out  even  by 
means  that  would  otherwise  be  legal;  and  although  the  purpose  be 
unlawful  it  may  not  be  carried  out  by  criminal  or  unlawful  means. 


270  LAW  AND  BUSINESS 

The  substance  of  the  matters  here  complained  of  is  an  inter- 
ference with  complainant's  interstate  trade,  intended  to  have  coercive 
effect  upon  complainant,  and  produced  by  what  is  commonly  known 
as  a  "secondary  boycott, "  that  is,  a  combination  not  merely  to  refrain 
from  dealing  with  complainant,  or  to  advise  or  by  peaceful  means 
persuade  complainant's  customers  to  refrain  ("primary  boycott"), 
but  to  exercise  coercive  pressure  upon  such  customers,  actual  or 
prospective,  in  order  to  cause  them  to  withhold  or  withdraw  patron- 
age from  complainant  through  fear  of  loss  or  damage  to  themselves 
should  they  deal  with  it. 

As  we  shall  see,  the  recognized  distinction  between  a  primary  and 
a  secondary  boycott  is  material  to  be  considered  upon  the  question 
of  the  proper  construction  of  the  Clayton  Act.  But,  in  determining 
the  right  to  an  injunction  under  that  and  the  Sherman  Act,  it  is  of 
minor  consequence  whether  either  kind  of  boycott  is  lawful  or  unlaw- 
ful at  common  law  or  under  the  statutes  of  particular  states.  Those 
acts,  passed  in  the  exercise  of  the  power  of  Congress  to  regulate 
commerce  among  the  states,  are  of  paramount  authority,  and  their 
prohibitions  must  be  given  full  effect  irrespective  of  whether  the 
things  prohibited  are  lawful  or  unlawful  at  common  law  or  under  local 
statutes. 

In  Loewe  v.  Lawlor,  208  U.S.  274,  where  there  was  an  effort  to 
compel  plaintiffs  to  unionize  their  factory  by  preventing  them  from 
manufacturing  articles  intended  for  transportation  beyond  the  state, 
and  also  by  preventing  vendees  from  reselling  articles  purchased  from 
plaintiffs  and  negotiating  with  plaintiffs  for  further  purchases,  by 
means  of  a  boycott  of  plaintiffs'  products  and  of  dealers  who  handled 
them,  this  court  held  that  there  was  a  conspiracy  in  restraint  of  trade 
actionable  under  section  7  of  the  Sherman  Act. 

In  Eastern  States  Retail  Lumber  Dealers'  Association  v.  United 
States,  234  U.S.  600,  wholesale  dealers  were  subjected  to  coercion 
merely  through  the  circulation  among  retailers,  who  were  members 
of  the  association,  of  information  in  the  form  of  a  kind  of  "black- 
list," intended  to  influence  the  retailers  to  refrain  from  dealing  with 
the  listed  wholesalers,  and  it  was  held  that  this  constituted  a  violation 
of  the  Sherman  Act.  Referring  to  this  decision,  the  court  said,  in 
Lawlor  v.  Loewe,  235  U.S.  522,  534: 

That  case  established  that,  irrespective  of  compulsion  or  even  agree- 
ment to  observe  its  intimation,  the  circulation  of  a  list  of  "unfair  dealers," 
manifestly  intended  to  put  the  ban  upon  those  whose  names  appear 


COMPETITIVE  LABOR  PRACTICES  271 

therein,  among  an  important  body  of  possible  customers  combined  with  a 
view  to  joint  action  and  in  anticipation  of  such  reports,  is  within  the 
prohibitions  of  the  Sherman  Act  if  it  is  intended  to  restrain  and  restrains 
commerce  among  the  states. 

It  is  settled  by  these  decisions  that  such  a  restraint  produced  by 
reasonable  persuasion  is  as  much  within  the  prohibition  as  one  accom- 
plished by  force  or  threats  of  force;  and  it  is  not  to  be  justified  by  the 
fact  that  the  participants  in  the  combination  or  conspiracy  may  have 
some  object  beneficial  to  themselves  or  their  associates  which  possibly 
they  might  have  been  at  liberty  to  pursue  in  the  absence  of  the 
statute. 

Upon  the  question  whether  the  provisions  of  the  Clayton  Act1 
forbade  the  grant  of  an  injunction  under  the  circumstances  of  the 

1  SEC.  6.  That  the  labor  of  a  human  being  is  not  a  commodity  or  article  of 
commerce.  Nothing  contained  in  the  antitrust  laws  shall  be  construed  to  forbid 
the  existence  and  operation  of  labor,  agricultural,  or  horticultural  organizations, 
instituted  for  the  purposes  of  mutual  help,  and  not  having  capital  stock  or  con- 
ducted for  profit,  or  to  forbid  or  restrain  individual  members  of  such  organizations 
from  lawfully  carrying  out  the  legitimate  objects  thereof;  nor  shall  such  organiza- 
tions, or  the  members  thereof,  be  held  or  construed  to  be  illegal  combinations  or 
conspiracies  in  restraint  of  trade,  under  the  antitrust  laws. 

SEC.  20.  That  no  restraining  order  or  injunction  shall  be  granted  by  any 
court  of  the  United  States,  or  a  judge  or  the  judges  thereof,  in  any  case  between 
an  employer  and  employees,  or  between  employers  and  employees,  or  between 
employees,  or  between  persons  employed  and  persons  seeking  employment,  involv- 
ing, or  growing  out  of,  a  dispute  concerning  terms  or  conditions  of  employment, 
unless  necessary  to  prevent  irreparable  injury  to  property,  or  to  a  property  right, 
of  the  party  making  the  application,  for  which  injury  there  is  no  adequate  remedy 
at  law,  and  such  property  or  property  right  must  be  described  with  particularity 
in  the  application,  which  must  be  in  writing  and  sworn  to  by  the  applicant  or 
by  his  agent  or  attorney. 

And  no  such  restraining  order  or  injunction  shall  prohibit  any  person  or  persons, 
whether  singly  or  in  concert,  from  terminating  any  relation  of  employment,  or 
from  ceasing  to  perform  any  work  or  labor,  or  from  recommending,  advising,  or 
persuading  others  by  peaceful  means  so  to  do;  or  from  attending  at  any  place  where 
any  such  person  or  persons  may  lawfully  be,  for  the  purpose  of  peacefully  obtaining 
or  communicating  information,  or  from  peacefully  persuading  any  person  to  work 
or  abstain  from  working;  or  from  ceasing  to  patronize  or  to  employ  any  party  to 
such  dispute,  or  from  recommending,  advising,  or  persuading  others  by  peaceful 
and  lawful  means  so  to  do;  or  from  paying  or  giving  to,  or  withholding  from,  any 
person  engaged  in  such  dispute,  any  strike  benefit  or  other  moneys  or  things  of 
value;  or  from  peaceably  assembling  in  a  lawful  manner,  and  for  lawful  purposes; 
or  from  doing  any  act  or  thing  which  might  lawfully  be  done  in  the  absence  of  such 
dispute  by  any  party  thereto;  nor  shall  any  of  the  acts  specified  in  this  paragraph 
be  considered  or  held  to  be  violations  of  any  law  of  the  United  States. 


272  LAW  AND  BUSINESS 

present  case,  the  Circuit  Court  of  Appeals  was  divided;  the  majority 
holding  that  under  section  20,  "  perhaps  in  conjunction  with  section 
6,"  there  could  be  no  injunction.  Defendants  seek  to  derive  from 
these  sections  some  authority  for  their  conduct.  As  to  section  6, 
it  seems  to  us  its  principal  importance  in  this  discussion  is  for  what  it 
does  not  authorize,  and  for  the  limit  it  sets  to  the  immunity  conferred. 
The  section  assumes  the  normal  objects  of  a  labor  organization  to  be 
legitimate,  and  declares  that  nothing  in  the  antitrust  laws  shall  be 
constructed  to  forbid  the  existence  and  operation  of  such  organiza- 
tions or  to  forbid  their  members  from  lawfully  carrying  out  their 
legitimate  objects;  and  that  such  an  organization  shall  not  be  held  in 
itself — merely  because  of  its  existence  and  operation — to  be  an  illegal 
combination  or  conspiracy  in  restraint  of  trade.  But  there  is  nothing 
in  the  section  to  exempt  such  an  organization  or  its  members  from 
accountability  where  it  or  they  depart  from  its  normal  and  legitimate 
objects  and  engage  in  the  actual  combination  or  conspiracy  in  restraint 
of  trade.  And  by  no  fair  or  permissible  construction  can  it  be  taken 
as  authorizing  any  activity  otherwise  unlawful,  or  enabling  a  normally 
lawful  organization  to  become  a  cloak  for  an  illegal  combination  or 
conspiracy  in  restraint  of  trade  as  denned  by  the  antitrust  laws. 

The  principal  reliance  is  upon  section  20.  This  regulates  the 
granting  of  restraining  orders  and  injunctions  by  the  courts  of  the 
United  States  in  a  designated  class  of  cases,  with  respect  to  (a)  the 
terms  and  conditions  of  the  relief  and  the  practice  to  be  pursued,  and 
(b)  the  character  of  the  acts  that  are  to  be  exempted  from  the  restraint; 
and  in  the  concluding  words  it  declares  (c)  that  none  of  the  acts  speci- 
fied shall  be  held  to  be  violations  of  any  law  of  the  United  States.  All 
its  provisions  are  subject  to  a  general  qualification  respecting  the 
nature  of  the  controversy  and  the  parties  affected.  It  is  to  be  a 
"case  between  an  employer  and  employees,  or  between  employers 
and  employees,  or  betweeen  employees,  or  between  persons  employed 
and  persons  seeking  employment,  involving,  or  growing  out  of,  a 
dispute  concerning  terms  or  conditions  of  employment." 

The  first  paragraph  merely  puts  into  statutory  form  familiar 
restrictions  upon  the  granting  of  injunctions  already  established  and 
of  general  applications  in  the  equity  practice  of  the  courts  of  the 
United  States.  It  is  but  declaratory  of  the  law  as  it  stood  before. 
The  second  paragraph  declares  that  "no  such  restraining  order  or 
injunction"  shall  prohibit  certain  conduct  specified — manifestly  still 
referring  to  a  "case  between  an  employer  and  employees,  .... 


COMPETITIVE  LABOR  PRACTICES  273 

involving,  or  growing  out  of,  a  dispute  concerning  terms  or  condi- 
tions of  employment,"  as  designated  in  the  first  paragraph.  It  is 
very  clear  that  the  restriction  upon  the  use  of  the  injunction  is  in 
favor  only  of  those  concerned  as  parties  to  such  a  dispute  ~as-is 
described.  The  words  defining  the  permitted  conduct  include  par- 
ticular qualifications  consistent  with  the  general  one  respecting  the 
nature  of  the  case  and  dispute  intended;  and  the  concluding  words, 
"nor  shall  any  of  the  acts  specified  in  this  paragraph  be  considered 
or  held  to  be  violations  of  any  law  of  the  United  States,"  are  to  be 
read  in  the  light  of  the  context,  and  mean  only  that  those  acts  are 
not  to  be  so  held  when  committed  by  parties  concerned  in  "  a  dispute 
concerning  terms  or  conditions  of  employment."  If  the  qualifying 
words  are  to  have  any  effect,  they  must  operate  to  confine  the  restric- 
tion upon  granting  of  injunctions,  and  also  the  relaxation  of  the  provi- 
sions of  the  antitrust  and  other  laws  of  the  United  States,  to  parties 
standing  in  proximate  relation  to  a  controversy  such  as  is  particularly 
described.  • 

The  majority  of  the  Circuit  Court  of  Appeals  appear  to  have 
entertained  the  view  that  the  words  "employers  and  employees"  as 
used  in  section  20  should  be  treated  as  referring  to  "  the  business  class 
or  clan  to  which  the  parties  litigant  respectively  belong";  and,  as 
there  had  been  a  dispute  at  complainant's  factory  in  Michigan  con- 
cerning the  conditions  of  employment  there — a  dispute  created,  it  is 
said,  if  it  did  not  exist  before,  by  the  act  of  the  Machinists'  Union  in 
calling  a  strike  at  the  factory — section  20  operated  to  permit  members 
of  the  Machinists'  Union  elsewhere — some  60,000  in  number — 
although  standing  in  no  relation  of  employment  under  complainant, 
past,  present,  or  prospective,  to  make  that  dispute  their  own  and 
proceed  to  instigate  sympathetic  strikes,  picketing,  and  boycotting 
against  employers  wholly  unconnected  with  complainant's  factory 
and  having  relations  with  complainant  only  in  the  way  of  purchasing 
its  product  in  the  ordinary  course  of  interstate  commerce — and  this 
where  there  was  no  dispute  between  such  employers  and  their  em- 
ployees respecting  terms  or  conditions  of  employment. 

We  deem  this  construction  altogether  inadmissable.  Section  20 
must  be  given  full  effect  according  to  its  terms  as  an  expression  of 
the  purpose  of  Congress;  but  it  must  be  borne  in  mind  that  the 
section  imposes  an  exceptional  and  extraordinary  restriction  upon 
the  equity  powers  of  the  courts  of  the  United  States  and  upon  the 
general  operation  of  the  antitrust  laws,  a  restriction  in  the  nature  of  a 


274  LAW  AND  BUSINESS 

special  privilege  or  immunity  to  a  particular  class,  with  corresponding 
detriment  to  the  general  public;  and  it  would  violate  rules  of  statutory 
construction  having  general  application  and  far-reaching  importance 
to  enlarge  that  special  privilege  by  resorting  to  a  loose  construction 
of  the  section,  not  to  speak  of  ignoring  or  slighting  the  qualifying 
words  that  are  found  in  it.  Full  and  fair  effect  will  be  given  to  every 
word  if  the  exceptional  privilege  be  confined — as  the  natural  meaning 
of  the  words  confines  it — to  those  who  are  proximately  and  substanti- 
ally concerned  as  parties  to  an  actual  dispute  respecting  the  terms  or 
conditions  of  their  own  employment,  past,  present,  or  prospective. 
The  extensive  construction  adopted  by  the  majority  of  the  court  below 
virtually  ignores  the  effect  of  the  qualifying  words.  Congress  had  in 
mind  particular  industrial  controversies,  not  a  general  class  war. 
"Terms  or  conditions  of  employment"  are  the  only  grounds  of 
dispute  recognized  as  adequate  to  bring  into  play  the  exemptions; 
and  it  would  do  violence  to  the  guarded  language  employed  were 
the  exemption  extended  beyond  the  parties  affected  in  a  proximate 
and  substantial,  not  merely  a  sentimental  or  sympathetic,  sense  by 
the  cause  of  dispute. 

Nor  can  section  20  be  regarded  as  bringing  in  all  members  of  a 
labor  organization  as  parties  to  a  "dispute  concerning  terms  or  condi- 
tions of  employment"  which  proximately  affects  only  a  few  of  them, 
with  the  result  of  conferring  upon  any  and  all  members — no  matter 
how  many  thousands  there  may  be,  nor  how  remote  from  the  actual 
conflict — those  exemptions  which  Congress  in  terms  conferred  only 
upon  parties  to  the  dispute.  That  would  enlarge  by  construction 
the  provisions  of  section  20,  which  contains  no  mention  of  labor 
organizations,  so  as  to  produce  an  inconsistency  with  section  6,  which 
deals  specifically  with  the  subject  and  must  be  deemed  to  express  the 
measure  and  limit  of  the  immunity  intended  by  Congress  to  be  incident 
to  mere  membership  in  such  an  organization.  At  the  same  time  it 
would  virtually  repeal  by  implication  the  prohibition  of  the  Sherman 
Act,  so  far  as  labor  organizations  are  concerned,  notwithstanding 
repeals  by  implication  are  not  favored;  and  in  effect,  as  was  noted 
in  Loewe  v.  Lawlor,  208  U.S.  274,  303—4,  would  confer  upon  voluntary 
associations  of  individuals  formed  within  the  states  a  control  over 
commerce  among  the  states  that  is  denied  to  the  governments  of  the 
states  themselves. 

The  qualifying  effect  of  the  words  descriptive  of  the  nature  of 
the  dispute  and  the  parties  concerned  is  further  borne  out  by  the 


COMPETITIVE  LABOR  PRACTICES  275 

phrases  defining  the  conduct  that  is  not  to  be  subjected  to  injunction 
or  treated  as  a  violation  of  the  laws  of  the  United  States,  that  is  to 
say:  (a)  "  terminating  any  relation  of  employment,  ....  or  persuad- 
ing others  by  peaceful  and  lawful  means  so  to  do";  (b)  "attending  at. 
any  place  where  any  such  person  or  persons  may  lawfully  be,  for  the 
purpose  of  peacefully  obtaining  or  communicating  information,  or 
from  peacefully  persuading  any  person  to  work  or  to  abstain  from 
working";  (c)  ''ceasing  to  patronize  or  to  employ  any  party  to  such 
dispute,  or  ....  recommending,  advising,  or  persuading  others  by 
peaceful  and  lawful  means  so  to  do";  (d)  "paying  or  giving  to,  or 
withholding  from,  any  person  engaged  in  such  dispute,  any  strike 
benefits  ....";  (e)  "doing  any  act  or  thing  which  might  lawfully 
be  done  in  the  absence  of  sucli  dispute  by  any  party  thereto."  The 
emphasis  placed  on  the  words  "lawful"  and  "lawfully,"  "peaceful" 
and  "peacefully,"  and  the  reference  to  the  dispute  and  the  parties 
to  it,  strongly  rebut  a  legislative  intent  to  confer  a  general  immunity 
for  conduct  violative  of  the  antitrust  laws,  or  otherwise  unlawful. 
The  subject  of  boycott  is  dealt  with  specifically  in  the  "ceasing  to 
patronize"  provision,  and  by  the  clear  force  of  the  language  employed 
the  exemption  is  limited  to  pressure  exerted  upon  a  "party  to  such 
dispute"  by  means  of  "peaceful  and  lawful"  influence  upon  neutrals. 
There  is  nothing  here  to  justify  defendants  or  the  organizations  they 
represent  in  using  either  threats  or  persuasion  to  bring  about  strikes 
or  a  cessation  of  work  on  the  part  of  employees  of  complainant's 
customers  or  prospective  customers,  or  of  the  trucking  company 
employed  by  the  customers,  with  the  object  of  compelling  such 
customers  to  withdraw  or  refrain  from  commercial  relations  with 
complainant,  and  of  thereby  constraining  complainant  to  yield  their 
matter  in  dispute.  To  instigate  a  sympathetic  strike  in  aid  of  a 
secondary  boycott  cannot  be  deemed  "peaceful  and  lawful"  per- 
suasion. In  essence  it  is  a  threat  to  inflict  damage  upon  the 
immediate  employer,  between  whom  and  his  employees  no  dispute 
exists,  in  order  to  bring  him  against  his  will  into  a  concerted  plan  to 
inflict  damage  upon  another  employer  who  is  in  dispute  with  his 
employees.  The  majority  of  the  Circuit  Court  of  Appeals,  very 
properly  treating  the  case  as  involving  a  secondary  boycott,  based 
the  decision  upon  the  view  that  it  was  the  purpose  of  section  20  to 
legalize  the  secondary  boycott  "at  least  in  so  far  as  it  rests  on,  or 
consists  of,  refusing  to  work  for  any  one  who  deals  with  the  principal 
offender."  Characterizing  the  section  as  "blindly  drawn,"  and  con- 


276  LAW  AND  BUSINESS 

ceding  that  the  meaning  attributed  to  it  was  broad,  the  court  referred 
to  the  legislative  history  of  the  enactment  as  a  warrant  for  the  con- 
stuction  adopted.  Let  us  consider  this. 

By  repeated  decisions  of  this  court  it  has  come  to  be  well 
established  that  the  debates  in  Congress  expressive  of  the  views  and 
motives  of  individual  members  are  not  a  safe  guide,  and  hence  may 
not  be  resorted  to,  in  ascertaining  the  meaning  and  purpose  of  the 
law-making  body.  Aldridge  v.  Williams,  3  How.  9,  24;  United 
States  v.  Union  Pacific  Railroad  Co.,  91  U.S.  72,  79.  But  reports  of 
committees  of  House  and  Senate  stand  upon  a  more  solid  footing, 
and  may  be  regarded  as  an  exposition  of  the  legislative  intent  in  a 
case  where  otherwise  the  meaning  of  a  statute  is  obscure.  Binns  v. 
United  States,  194  U.S.  486,  495.  And  this  has  been  extended  to 
include  explanatory  statements  in  the  nature  of  a  supplemental  report 
made  by  the  committee  member  in  charge  of  a  bill  in  course  of  pas- 
sage. Binns  v.  United  States,  supra;  Pennsylvania  Railroad  Co.  v. 
International  Coal  Co.,  230  U.S.  184,  198—99;  United  States  v.  Coca 
Cola  Co.,  241  U.S.  265,  281;  United  States  v.  St.  Paul,  Minneapolis 
6°  Manitoba  Railway  Co.,  247  U.S.  310. 

In  the  case  of  the  Clayton  Act,  the  printed  committee  reports  are 
not  explicit  with  respect  to  the  meaning  of  the  "ceasing  to  patronize" 
clause  of  what  is  now  section  20.  But  they  contain  extracts  from 
judicial  opinions  and  a  then  recent  textbook  sustaining  the  "  primary 
boycott,"  and  expressing  an  adverse  view  as  to  the  secondary  or 
coercive  boycott;  and,  on  the  whole,  are  far  from  manifesting  a 
purpose  to  relax  the  prohibition  against  restraints  of  trade  in  favor 
of  the  secondary  boycott. 

Moreover,  the  report  was  supplemented  in  this  regard  by  the 
spokesman  of  the  House  committee  (Mr.  Webb)  who  had  the  bill  in 
charge  when  it  was  under  consideration  by  the  House.  The  question 
whether  the  bill  legalized  the  secondary  boycott  having  been  raised, 
it  was  emphatically  and  unequivocally  answered  by  him  in  the  nega- 
tive. The  subject,  he  declared  in  substance  or  effect,  was  under 
consideration  when  the  bill  was  framed,  and  the  section  as  reported 
was  carefully  prepared  with  the  settled  purpose  of  excluding  the 
secondary  boycott  and  confining  boycotting  to  the  parties  to  the 
dispute,  allowing  parties  to  cease  to  patronize  and  to  ask  others  to 
cease  to  patronize  a  party  to  the  dispute;  it  was  the  opinion  of  the 
committee  that  it  did  not  legalize  the  secondary  boycott,  it  was  not 
their  purpose  to  authorize  such  a  boycott,  not  a  member  of  the  com- 


COMPETITIVE  LABOR  PRACTICES  277 

mittee  would  vote  to  do  so;  clarifying  amendment  was  unnecessary;, 
the  section  as  reported  expressed  the  real  purpose  so  well  that  it  could 
not  be  tortured  into  a  meaning  authorizing  the  secondary  boycott. 
This  was  the  final  word  of  the  House  committee  on  the  subject,-and 
was  uttered  under  such  circumstances  and  with  such  impressive 
emphasis  that  it  is  not  going  too  far  to  say  that  except  for  this  exposi- 
tion of  the  meaning  of  the  section  it  would  not  have  been  enacted 
in  the  form  in  which  it  was  reported.  In  substantially  that  form  it 
became  law;  and  since  in  our  opinion  its  proper  construction  is 
entirely  in  accord  with  its  purpose  as  thus  declared,  little  need  be 
added. 

The  extreme  and  harmful  consequences  of  the  construction 
adopted  in  the  court  below  are  not  to  be  ignored.  The  present  case 
furnishes  an  apt  and  convincing  example.  An  ordinary  controversy 
in  a  manufacturing  establishment,  said  to  concern  the  terms  or  condi- 
tions of  employment  there,  has  been  held  a  sufficient  occasion  for 
imposing  a  general  embargo  upon  the  products  of  the  establishment 
and  a  nation-wide  blockade  of  the  channels  of  interstate  commerce 
against  them,  carried  out  by  inciting  sympathetic  strikes  and  a  second- 
ary boycott  against  complainant's  customers,  to  the  great  and  incalcu- 
lable damage  of  many  innocent  people  far  remote  from  any  connection 
with  or  control  over  the  original  and  actual  dispute — people  constitut- 
ing, indeed,  the  general  public  upon  whom  the  cost  must  ultimately 
fall,  and  whose  vital  interest  in  unobstructed  commerce  constituted 
the  prime  and  paramount  concern  of  Congress  in  enacting  the  anti- 
trust laws,  of  which  the  section  under  consideration  forms  after  all  a 
part. 

Reaching  the  conclusion,  as  we  do,  that  complainant  has  a  clear 
right  to  an  injunction  under  the  Sherman  Act  as  amended  by  the 
Clayton  Act,  it  becomes  unnecessary  to  consider  whether  a  like  result 
would  follow  under  the  common  law  or  local  statutes,  there  being  no 
suggestion  that  relief  thereunder  could  be  broader  than  that  to  which 
complainant  is  entitled  under  the  acts  of  Congress. 

There  should  be  an  injunction  against  defendants  and  the  associa- 
tions represented  by  them,  and  all  members  of  those  associations,4 
restraining  them,  according  to  the  prayer  of  the  bill,  from  interfering 
or  attempting  to  interfere  with  the  sale,  transportation,  or  delivery  in 
interstate  commerce  of  any  printing  press  or  presses  manufactured  by 
complainant,  or  the  transportation,  carting,  installation,  use,  opera- 
tion, exhibition,  display,  or  repairing  of  any  such  press  or  presses, 


278  LAW  AND  BUSINESS 

.or  the  performance  of  any  contract  or  contracts  made  by  complainant 
respecting  the  sale,  transportation,  delivery,  or  installation  of  any 
such  press  or  presses,  by  causing  or  threatening  to  cause  loss,  damage, 
trouble,  or  inconvenience  to  any  person,  firm,  or  corporation  concerned 
in  the  purchase,  transportation,  carting,  installation,  use,  operation, 
exhibition,  display,  or  repairing  of  any  such  press  or  presses,  or 
the  performance  of  any  such  contract  or  contracts;  and  also  and 
especially  from  using  any  force,  threats,  command,  direction,  or  even 
persuasion  with  the  object  or  having  the  effect  of  causing  any  person 
or  persons  to  decline  employment,  cease  employment,  or  not  seek 
employment,  or  to  refrain  from  work  or  cease  working  under  any 
person,  firm,  or  corporation  being  a  purchaser  or  prospective  purchaser 
of  any  printing  press  or  presses  from  complainant,  or  engaged  in  haul- 
ing, carting,  delivering,  installing,  handling,  using,  operating,  or  repair- 
ing any  such  press  or  presses  for  any  customer  of  complainant.  Other 
threatened  conduct  by  defendants  or  the  associations  they  represent, 
or  the  members  of  such  associations,  in  furtherance  of  the  secondary 
boycott  should  be  included  in  the  injunc  ion  according  to  the  proofs. 

Decree  reversed,  and  the  cause  remanded  to  the  District  Court 
for  further  proceedings  in  conformity  with  this  opinion. 

JUSTICES  BRANDEIS,  CLARKE,  and  HOLMES,  dissenting. 

QUESTIONS 

1.  Would  the  court  have  reached  a  different  conclusion  in  Lawlor  v.  Loewe, 
supra,  page  264,  if  the  case  had  arisen  after  the  passage  of  the  Clayton 
Act? 

2.  What  reasons  induced  Congress  to  pass  the  Clayton  Law  ? 

3.  Does  the  Clayton  Act  change  the  common  law  as  to  the  legality  of 
bargaining  practices  in  labor  controversies  or  is  it  simply  designed  to 
control  the  use  of  the  writ  of  injunction  ? 

4.  Under  the  provisions  of  this  law,  when  is  the  writ  of  injunction  an 
appropriate  remedy  in  a  labor  controversy  ? 

5.  By  what  process  of  reasoning  did  the  court  in  the  principal  case  arrive 
at  the  conclusion  that  the  complainant  was  entitled  to  an  injunction 
notwithstanding  the  provisions  of  the  Clayton  Act  ? 


LAW  AND  THE  FORM  OF  THE 
BUSINESS  UNIT 


CHAPTER  I 

INTRODUCTORY  TOPICS 

The  final  topic  for  consideration  in  this  study  deals  with  the  legal 
aspects  of  the  business  unit.  The  business  man,  in  choosing  the  form 
of  unit  in  which  he  will  carry  on  his  business,  in  organizing,  financing, 
managing,  and  dissolving  it,  and  in  meeting  its  various  responsi- 
bilities to  its  members  and  to  third  persons,  will  encounter  many  legal 
problems.  Some  understanding  of  these  legal  problems  will  greatly 
assist  the  business  manager  in  performing  his  various  duties  in  con- 
nection with  the  business  unit. 

What  is  the  most  appropriate  unit  in  which  to  carry  on  a  given 
business,  is  a  question  which  sooner  or  later  conies  to  every  business 
man.  Shall  he  conduct  his  business  as  an  individual  enterpriser? 
Shall  he  appoint  agents  and  delegate  to  them  a  part  of  his  duties  in 
carrying  on  the  business  ?  Shall  he  associate  with  himself  others  as 
joint-principals?  Shall  he  organize  his  business  and  conduct  it  in 
corporate  form?  Or  shall  he  resort  to  some  other  organization 
device  ?  Organization  devices,  just  as  all  other  social  and  economic 
institutions,  originate  and  develop  in  response  to  social  and  economic 
needs.  The  various  types  of  business  units  to  which  reference  has 
been  made  have  developed  and  are  continuing  to  develop  in  terms  of 
business  demands.  There  is,  therefore,  in  the  nature  of  things,  no 
hard-and-fast  rule  for  determining  what  is  the  most  appropriate  unit 
for  a  given  business.  What  is  appropriate  for  one  business  may  be 
quite  inappropriate  for  another.  The  question  of  the  appropriateness 
of  the  business  unit  must  be  answered,  in  the  first  place,  in  terms  of 
the  nature,  size,  and  peculiar  needs  of  a  given  business;  it  must  be 
answered,  in  the  second  place,  in  terms  of  the  nature  and  character- 
istics of  the  various  forms  of  the  business  unit.  In  other  words,  the  prob- 
lem is  to  discover  the  form  of  the  unit  which  most  nearly  fits  the  particu- 
lar business,  and  the  solution  of  this  problem  necessitates  an  under- 
standing both  of  the  needs  of  the  business  and  of  the  advantages  and  dis- 
advantages of  the  various  organization  devices.  Is  the  business  one 
which  demands  close  personal  relations  ?  Are  the  primary  considera- 
tions economy  and  simplicity  in  organization?  Is  the  business  one 
which  demands  more  capital  than  a  private  individual  can  ordinarily 

281 


282  LAW  AND  BUSINESS 

provide  ?  Is  it  a  business  which  demands  a  large  amount  of  capital  ? 
Is  it  a  speculative  or  hazardous  business  in  the  conduct  of  which  it  is 
desirable  to  limit  the  liability  of  its  proprietors  ?  Is  it  a  business  in 
which  management  plays  a  large  part?  Is  the  business  one  which 
requires  a  fairly  permanent  and  certain  existence  ?  These  are  typical 
of  the  questions  which  the  business  man  must  ask  in  determining 
the  fitness  of  a  given  organization  device  for  a  given  business  and 
can  only  be  answered  in  terms  of  the  legal  characteristics  and  attri- 
butes of  the  various  forms  of  the  business  unit  to  which  he  can  resort. 

Assuming  that  the  business  man  has  decided  upon  the  form  of  unit 
in  which  he  will  carry  on  his  business,  his  next  problem  is  to  organize 
his  business  in  terms  of  that  form  of  unit.  In  some  cases  he  will  have 
to  comply  with  definite,  formal  requirements;  in  other  cases  he  may 
encounter  no  formal  requirements  at  all.  In  any  event,  however, 
whether  required  by  law  or  not,  there  are  certain  precautionary  steps 
in  organization  which  he  should  take  to  safeguard  the  rights  of 
different  parties.  What  must  he  do  to  protect  his  own  interests? 
What  should  he  do  to  safeguard  the  interests  of  his  business  associates  ? 
What  should  he  do  to  protect  the  interests  of  the  persons  who  will 
deal  with  the  unit  ?  What  are  the  legal  consequences  which  attach 
to  his  failure  to  make  adequate  provisions  for  the  protection  of  these 
interested  parties  ? 

Prior  or  subsequent  to,  or  contemporaneous  with,  the  organiza- 
tion of  the  unit  will  come  questions  relating  to  the  best  method  or 
methods  of  financing  the'  business.  The  business  man  will  discover 
that  different  considerations  apply  in  financing  a  business,  depending 
upon  the  particular  organization  device  which  has  been  selected.  He 
will,  therefore,  want  to  know,  in  terms  of  the  form  of  unit  which  he  has 
chosen,  what  are  the  most  efficient  legal  devices  to  which  he  can  resort 
in  raising  capital;  how  these  devices  can  best  be  utilized;  what  pitfalls 
he  should  watch  for  and  what  safe-guards  he  can  establish  in  utiliz- 
ing these  devices;  and  what  inducements,  peculiar  to  the  unit  which 
he  has  chosen,  he  can  offer  to  prospective  investors. 

After  the  business  unit  has  been  organized  and  financed  arises 
the  problem  of  managing  the  unit  from  day  to  day,  the  most  impor- 
tant of  all  the  problems  in  connection  with  the  business  unit  from  the 
point  of  view  of  the  business  manager.  In  the  first  place,  he  will 
find  that  one  of  his  chief  tasks  is  to  keep  the  unit  within  the  scope  of 
its  powers.  He  will,  therefore,  need  to  know  what  powers  the  unit 
enjoys  and  can  exercise;  and  what  legal  consequences  follow  from 
exceeding  its  powers.  In  the  second  place,  he  will  find  that  another 


INTRODUCTORY  TOPICS  283 

of  his  tasks  is  to  see  that  the  unit  exercises  its  power  in  the  authorized 
manner.  He  will,  therefore,  need  to  know  how  the  powers  of  the 
unit  are  to  be  exercised.  By  whom,  for  instance,  are  the  affairs  of 
a  given  unit  to  be  managed  ?  How  far  can  the  majority  go  in  Con- 
ducting the  business  to  suit  themselves  ?  How  far  can  the  minority 
object  to  the  plans  and  policies  of  the  majority?  What  are  the 
appropriate  remedies  of  the  minority  in  case  the  majority  are  over- 
reaching the  minority  in  the  management  of  the  unit?  What  are 
the  duties  of  the  officers  and  agents  of  the  unit  to  the  unit  and  to  the 
members  of  the  unit?  What  are  the  duties  of  the  members  of  the 
unit  to  the  unit  and  to  each  other  ? 

In  carrying  on  the  business,  the  unit  through  its  officers  and  agents 
may  do  wrongs  of  one  kind  or  another  and  perhaps  commit  crimes. 
Who  is  to  be  held  responsible  for  these  wrongs  and  crimes  ?  Is  the 
unit  itself  solely  responsible  for  them  ?  Are  the  officers  and  agents 
of  the  unit  solely  responsible  for  them?  Are  the  members  of  the 
unit  responsible  ?  Are  they  all  jointly  responsible  ? 

In  the  course  of  its  business  the  unit  will  incur  debts  from  time  to 
time.  Those  responsible  for  the  management  of  the  unit  will  need 
to  know  what  powers  creditors  have  to  subject  the  property  of  the 
unit  and  its  members  to  the  payment  of  these  debts.  Are  creditors 
limited  to  the  property  of  the  unit  in  securing  satisfaction  of  their 
claims?  May  they  proceed  against  the  property  of  the  individual 
members  of  the  unit?  Or  may  the  creditors  proceed  against  the 
property  of  either  at  their  pleasure  ? 

Important  questions  arise  with  reference  to  the  dissolution  or 
termination  of  the  business  unit.  How  long  does  a  given  unit  have 
the  power  to  exist?  Can  the  state  in  any  manner  terminate  the 
relation  before  its  allotted  time  ?  Can  individual  members  bring  it 
to  an  end  prematurely  ?  Can  a  majority  of  the  members  terminate 
the  unit  without  the  consent  of  the  minority?  Assuming  that  in 
one  way  or  another  the  unit  has  been  dissolved,  what  are  the  conse- 
quences of  dissolution  ?  What  becomes  of  the  liabilities  of  the  unit  ? 
What  becomes  of  its  property  ? 

The  foregoing  comments  and  questions  indicate  in  broad  outline 
the  scope  of  our  study  of  the  legal  aspects  of  the  form  of  the  business 
unit.  The  treatment  of  these  different  problems  must  necessarily  be 
brief  because  of  limitations  of  space  and  time.  It  is  hoped,  however, 
that  the  materials  to  follow,  which  are  arranged  in  terms  of  this 
outline,  will  give  some  appreciation  of  the  legal  aspects  of  the  business 
man's  relation  to  the  form  of  his  business  unit. 


CHAPTER  II 

NATURE  AND  CHARACTERISTICS  OF  FORMS  OF 
THE  BUSINESS  UNIT 

PRATT  v.  BACON 
10  Pickering's  Massachusetts  Reports  123  (1830) 

PER  CURIAM.  There  is  certainly  some  resemblance  between 
a  corporation  and  a  partnership,  inasmuch  as  each  may  consist  of 
two  or  more  persons  associated  together,  and  acting  in  concert,  for 
the  promotion  of  some  private  or  public  object.  But  the  difference 
between  the  relative  rights  and  duties,  the  legal  qualities  and  charac- 
teristics of  the  members  of  a  manufacturing  corporation,  and 
copartners  and  tenants  in  common,  is  obvious  and  strongly  marked. 
A  corporation  is  an  ideal  body,  subsisting  only  in  contemplation  of 
law,  which  may  be  composed  of  members  constantly  changing,  which 
is  deemed,  for  useful  purposes,  to  have  an  existence  independently 
of  that  of  all  the  members  of  which  it  is  composed,  to  be  capable 
of  perpetual  succession,  and  of  acquiring,  holding,  and  conveying 
property.  Its  real  and  personal  property  is  deemed  to  be  vested 
in  the  corporation  and  not  in  the  individuals  composing  it;  and  these 
have  no  other  interest  in  it,  or  control  over  it,  than  the  qualified  ones, 
of  electing  officers,  and  receiving  dividends  and  profits  in  the  manner 
provided  by  the  act  of  incorporation,  or  the  votes  and  by-laws,  which 
may  be  made  pursuant  to  the  powers  conferred  by  it.  They  cannot 
bind  their  associates,  or  the  corporation,  either  in  any  personal 
obligation,  or  executory  contract,  nor  alienate,  pledge,  or  otherwise 
affect  the  corporate  property,  by  any  sale,  mortgage,  contract,  or  other 
personal  act.  They  may  change  their  relation  to  the  corporation, 
at  any  tune,  by  a  sale  of  their  shares;  and  such  sale  is  not  deemed  to 
be  a  transfer  of  any  legal  interest  in  the  corporate  property,  but 
of  the  qualified,  beneficial  interest  before  mentioned.  By  a  like 
transfer  of  shares,  strangers  may  become  members  without  the  consent 
of  the  corporation,  unless  when  some  restraint  is  imposed  upon  the 
general  right  by  a  by-law;  and  such  by-law,  by  imposing  a  particular 
limitation,  would  itself  imply  the  existence  of  the  general  rule.  It  is 
true  that  at  the  time  this  corporation  was  established,  by  force  of  a 

284 


NATURE  AND  CHARACTERISTICS  OF  FORMS  285 

particular  provision  of  law,  the  individual  members  were  made 
conditionally  liable  for  the  debts  of  the  corporation;  but  as  the  law 
then  stood,  this  liability  ceased  by  their  ceasing  to  be  members,  by 
a  sale  of  their  shares,  even  for  debts  and  obligations  incurred  while 
they  were  members,  contrary  to  the  well-known  rule  of  law  in  relation 
to  partners.  But  further,  this  liability  was  several  and  joint;  it 
was  provisional  and  collateral,  in  the  nature  of  a  guaranty,  not  the 
debt  or  obligation  of  the  corporators  themselves  personally;  it 
resulted  from  the  positive  provision  of  the  statute,  and  not  from  the 
common  law  obligation  of  a  contract  deemed  to  be  made  "by  them  and 
growing  out  of  the  relation  in  which  they  were  placed.  In  all  these 
respects  the  members  of  a  manufacturing  corporation,  in  their  legal 
relation  to  each  other,  differ  essentially  and  radically  from  partners, 
joint-tenants  and  tenants  in  common. 

QUESTIONS 

1 .  What  is  a  corporation  ?    What  is  the  difference  between  a  sole  corpora- 
tion and  an  aggregate  corporation?  between  a  public  corporation  and 
a  private  corporation?  between  a  stock  corporation  and  a  non-stock 
corporation  ? 

2.  Draw  up  in  outline  form  the  outstanding  differences  between  a  corpora- 
tion and  a  partnership. 

3.  What  is  meant  by  the  statement  that  a  corporation  is  a  statutory  body 
and  that  a  partnership  is  a  common-law  body  ? 

4.  What  is  meant  by  the  statement  that  a  corporation  enjoys  perpetual 
succession  ?     Does  a  partnership  possess  this  characteristic  ? 

5.  What  is  the  effect  on  the  corporation  of  a  transfer  of  his  stock  by  a 
stockholder?    What  is  the  effect  on  a  partnership  of  a  transfer  of  his 
interest  by  a  partner  ? 

6.  What  is  meant  by  the  statement  that  a  corporation  is  a  legal  entity  and 
that  a  partnership  is  a  mere  group  of  individuals  acting  collectively? 
Point  out  some  of  the  implications  of  this  statement. 

7.  Which  is  the  more  restricted  by  state  control  in  its  activities,  the  corpora- 
tion or  the  partnership  ?    What  practical  difference  does  it  make  whether 
the  one  or  the  other  is  more  frequently  the  subject  of  state  control  ? 

LIVERPOOL   INSURANCE   COMPANY  v.  MASSACHUSETTS 

10  Wallace's  United  States  Reports  566  (1870) 

MILLER,  J.  The  institution  now  known  as  the  Liverpool  and 
London  Life  and  Fire  Insurance  Co.,  doing  an  immense  business  in 
England  and  in  this  country,  was  first  organized  at  Liverpool  by 


286  LAW  AND  BUSINESS 

what  is  there  called  a  deed  of  settlement,  and  would  here  be  called 
articles  of  association. 

It  will  be  seen  by  reference  to  the  powers  of  the  association,  as 
organized  under  the  deed  of  settlement,  legalized  and  enlarged  by 
acts  of  Parliament,  that  it  possesses  many,  if  not  all,  the  attributes 
generally  found  in  corporations  for  pecuniary  profit,  which  are  deemed 
essential  to  their  corporate  character. 

1.  It  has  a  distinctive  and  artificial  name  by  which  it  can  make 
contracts. 

2.  It  has"  a  statutory  provision  by  which  it  can  sue  and  be  sued 
in  the  name  of  one  of  its  officers  as  the  representative  of  the  whole 
body,  which  is  bound  by  the  judgment  rendered  in  such  suit. 

3.  It  has  provision  for  perpetual  succession  by  the  transfer  and 
transmission  of  the  shares  of  its  capital  stock,  whereby  new  members 
are  introduced  in  place  of  those  who  die  or  sell  out. 

4.  Its  existence  as  an  entity  apart  from  the  shareholders  is  recog- 
nized by  the  act  of  Parliament  which  enables  it  to  sue  its  shareholders 
and  to  be  sued  by  them. 

Most  of  the  states  of  the  Union  have  general  laws  by  which 
persons  associating  themselves  together,  as  the  shareholders  in  this 
company  have  done,  become  a  corporation. 

It  is  objected  that  the  association  is  nothing  but  a  partnership, 
because  its  members  are  liable  individually  for  the  debts  of  the  com- 
pany. But  however  the  law  on  this  subject  may  be  held  in  England, 
it  is  quite  certain  that  the  principle  of  personal  liability  of  the  share- 
holders attaches  to  a  very  large  proportion  of  the  corporations  of 
this  country,  and  it  is  a  principle  which  has  warm  advocates  for  its 
universal  application  when  the  organization  is  for  pecuniary  profit. 

It  is  also  urged  that  the  several  acts  of  Parliament  we  have 
mentioned  expressly  declare  that  they  shall  not  be  held  to  constitute 
the  body  of  a  corporation. 

But  whatever  may  be  the  effect  of  such  a  declaration  in  the 
courts  of  that  country,  it  cannot  alter  the  essential  nature  of  a  corpora- 
tion or  prevent  the  courts  of  another  jurisdiction  from  inquiring  into 
its  true  character,  whenever  they  may  come  in  issue. 

The  question  before  us  is  whether  an  association,  such  as  the 
one  we  are  considering,  in  attempting  to  carry  on  its  business  in 
a  manner  which  requires  corporate  powers  under  legislative  sanction, 
can  claim,  in  a  jurisdiction  foreign  to  the  one  which  gave  those  powers, 
that  it  is  only  a  partnership. 


NATURE  AND  CHARACTERISTICS  OF  FORMS  287 

We  have  no  hesitation  in  holding  that,  as  the  law  of  corporations 
is  understood  in  this  country,  the  association  is  a  corporation,  and 
that  the  law  of  Massachusetts,  which  only  permits  it  to  exercise  its 
corporate  function  in  that  state  on  the  condition  of  payment  of  a 
specific  tax,  is  no  violation  of  the  federal  constitution  or  of  any  treaty 
protected  by  said  constitution. 

BRADLEY,  J.  (Dissenting.)  While  I  agree  in  the  result  which 
the  court  has  reached,  I  differ  from  it  on  the  question  whether  the 
company  is  a  corporation.  I  think  it  is  one  of  those  special  partner- 
ships which  are  called  joint-stock  companies,  well  known  in  England 
for  nearly  a  century,  and  cannot  maintain  an  action  or  be  sued  as  a 
corporation  in  this  country  without  legislative  aid.  But  as  it  is  a 
company  associated  under  the  laws  of  a  foreign  country,  it  comes 
within  the  scope  of  the  Massachusetts  statute,  and  cannot  claim 
exemption  from  its  operation  for  the  causes  alleged  in  that  behalf. 
It  could  not  have  been  the  intent  of  the  treaty  of  1815  to  prevent  the 
States  from  imposing  taxes  or  license  laws  upon  either  British  corpora- 
tions or  joint-stock  companies  desiring  to  establish  banking  or 
insurance  business  therein.  And  certainly  these  companies  cannot  be 
exempted  from  such  laws  on  the  ground  that  citizens  have  chosen 
to  take  some  of  their  shares. 

QUESTIONS 

1.  What  was  the  association  under  consideration  in  this  case?    In  what 
respect  did  it  resemble  a  corporation  ?  a  partnership  ?    What  practical 
difference  did  it  make  whether  it  was  the.  one  or  the  other  ? 

2.  What  is  a  joint-stock  company  ?    How  does  it  differ  from  a  corporation  ? 
from  a  partnership  ? 

3.  The  legislature  of  a  certain  state  provides  that  two  or  more  persons,  upon 
the  taking  of  certain  prescribed  steps,  may  associate  themselves  together 
in  a  common  business;  that  the  association  may  have  a  common  name 
in  which  it  may  contract,  receive,  hold  and  transfer  property,  sue  and 
be  sued.    Is  this  a  corporation  ?    Is  it  a  partnership  ? 

4.  The  legislature  provides  further  that   the  death  of  a  member  of  the 
association  shall  not  work  a  dissolution  of  the  organization;  and  that  its 
capital  may  be  divided  into  transferable  shares.    Is  this  a  corporation  ? 
Is  it  a  partnership  ? 

5.  The  legislature  provides,  in  addition  to  the  foregoing,  that  the  individual 
property  of  the  members  of  the  association  shall  not  be  liable  for  the 
debts  of  the  association  until  the  assets  of  the  association  have  been 
exhausted.    Is  this  a  corporation  or  a  partnership  ? 


288  LAW  AND  BUSINESS 

/  BURT  v.  LATHROP 

52  Michigan  Reports  106  (1883) 

CAMPBELL,  J.  Plaintiff  sued  a  large  number  of  defendants  as 
jointly  liable  to  him  for  his  services  as  attorney  in  defending  some 
patent  suits  concerning  the  right  to  use  certain  hard-rubber  material 
in  dentistry.  He  declared  specially  and  with  the  common  counts 
for  these  services,  and  also  set  up  two  judgments  rendered  in  Jackson 
County  for  the  same  causes  of  action.  Upon  trial  the  court  below 
ordered  a  verdict  for  defendants. 

The  counts  which  described  the  judgments  do  not  set  them  out 
in  such  a  way  as  to  make  out  any  legal  liability  under  them  against 
all  these  defendants,  and  the  proofs  are  not  any  more  definite.  It 
appears  affirmatively  that  no  jurisdiction  existed  to  bind  more  than 
a  part  of  them,  and  there  can  be  nothing  claimed  for  them  under  the 
issue  as  presented.  They  may,  therefore,  be  laid  aside. 

The  ground  for  asserting  a  claim  against  the  defendants  jointly 
is  that  they  are  claimed  to  have  become  members  of  an  association 
combined  for  the  purpose  of  legal  resistance  to  the  claims  of  the 
patentee,  and  that  plaintiff  was  employed  by  their  officers. 

There  is  no  testimony  tending  to  show  any  immediate  personal 
employment  of  plaintiff  by  the  defendants,  jointly  or  individually, 
so  as  to  justify  this  joint  action.  But  it  was  claimed  that  they  stood 
on  the  footing  of  partners  bound  by  the  action  of  their  designated 
managing  members. 

The  testimony  indicates  that  several  of  the  defendants,  at  various 
times,  became  members  of  an  association  which,  so  far  as  pertinent 
to  this  inquiry,  required  them  to  pay  five  dollars  each  into  the  treasury 
and  to  pay  such  assessments  as  should  be  levied  pro  rata,  on  pain  of 
being  left  out  of  the  association  and  its  privileges.  The  officers  were 
to  employ  counsel,  and  money  was  to  be  paid  on  the  order  of  the 
president  and  secretary. 

We  can  find  in  this  arrangement  nothing  analogous  to  a  partner- 
ship. There  was  no  common  business  and  nothing  involving  profit 
and  loss  in  a  business  sense.  No  one  was  empowered  to  make  contracts 
binding  on  the  subscribers  personally,  and  no  one  was  to  be  liable 
except  for  assessments  nor  even  for  those  except  as  he  saw  fit  to  pay 
them  to  keep  his  membership.  It  was  nothing  more  than  a  combina- 
tion which  may  have  made  the  parties  in  some  respects  responsible 
to  each  other,  but  which  did  not,  we  think,  authorize  any  contract 


NATURE  AND  CHARACTERISTICS  OF  FORMS  289 

with  third  persons  which  should  bind  any  member  personally  beyond 
his  assessments.  As  plaintiff  was  not  only  aware  of  the  articles 
but  showed  that  he  acted  under  them  and  in  furtherance  of  them 
in  various  ways,  no  question  arises  in  the  nature  of  an  equitable 
estoppel. 

We  are  not  concerned  on  this  record  to  consider  whether  plaintiff 
has  any  other  adequate  means  of  securing  compensation.  The  only 
question  now  is  whether  these  defendants  are  his  joint  debtors.  We 
think  they  are  not. 

Judgment  affirmed. 
QUESTIONS 

1.  Do  you  conclude  from  the  decision  in  this  case  that  the  plaintiff  has  no 
remedy  against  the  defendants  ? 

2.  An  action  was  brought  against  a  large  number  of  persons,  members  of  a 
masonic  lodge,  to  hold  them  liable  as  partners  upon  a  certificate  of 
indebtedness,  executed  by  the  master  and  wardens  of  the  lodge  for  a  debt 
incurred  in  the  erection  of  a  lodge  building.    The  lodge  was  organized 
for  charitable,  benevolent,  and  social  purposes.    What  decision  in  the 
action  ? 

3.  How  would  you  define  a  partnership?    Distinguish  it  from  the  relation 
of  principal  and  agent. 

4.  Can  there  be  such  an  organization  as  a  non-profit  corporation  ? 

WHITE  v.  EISEMAN 
134  New  York  Reports  101  (1892) 

APPEAL  from  judgment  of  the  General  Term  of  the  Supreme 
Court  in  the  first  judicial  department,  entered  upon  an  order  made 
December  31,  1890,  which  overruled  defendants'  exceptions,  denied 
their  motion  for  a  new  trial  and  ordered  judgment  for  plaintiffs  on 
a  verdict  directed  by  the  court. 

This  action  was  brought  to  recover  from  the  defendants,  as  general 
partners  composing  the  firm  of  Spencer  &  Perkins,  a  demand  of  the 
plaintiffs  against  that  firm  for  goods  sold  and  delivered. 

The  defendants,  Samuel  and  Moses  Eiseman,  alleged  in  their 
answer  that  said  firm  was  a  limited  partnership,  composed  of  them- 
selves as  special  partners  and  of  Sidney  S.  Spencer  and  George  E. 
Perkins  as  general  partners. 

On  the  trial  it  appeared  that  a  certificate  of  limited  partnership, 
in  the  usual  form,  was  signed  and  acknowledged  by  the  general  and 
special  partners  on  the  third  of  August,  1886.  On  the  same  day  the 


2QO  LAW  AND  BUSINESS 

special  partners  delivered  to  said  Spencer  their  check  of  even  date  on 
a  solvent  bank,  payable  to  the  order  of  Spencer  &  Perkins,  for  $10,000, 
the  amount  of  their  contribution  toward  the  common  stock,  as  stated 
in  the  certificate.  Samuel  Eiseman  signed  the  check,  deducted  the 
amount  thereof  from  the  balance  that  he  and  Moses  Eiseman  then 
had  on  deposit  in  the  bank  and  it  was  charged  to  them  on  their 
bank  book  when  balanced  on  the  following,  day.  The  check  was 
duly  certified  by  the  bank  August  4,  and  deposited  to  the  credit  of 
the  firm  August  5  at  2:00  P.M.,  on  which  day  at  4:45  P.M.,  the  certifi- 
cate and  affidavit  were  filed.  The  check  was  paid  on  the  sixth  of 
August  to  the  bank  in  which  it  had  been  deposited.  The  affidavit 
was  made  August  3,  the  day  that  the  jurat  bears  date,  by  Mr.  Spencer, 
who  stated  therein  "that  the  sum  specified  in  said  certificate  to  have 
been  contributed  by  the  special  partners  to  the  common  stock  has 
been  actually  and  in  good  faith  paid  in  cash." 

At  the  close  of  the  evidence  the  court  directed  a  verdict  in  favor 
of  the  plaintiffs  for  the  amount  claimed  and  the  exception  of  the 
defendants,  Samuel  and  Moses  Eiseman,  to  such  direction  was  over- 
ruled by  the  General  Term  and  a  judgment  directed  on  the  verdict, 
one  of  the  justices  dissenting. 

VANN,  J.  The  primary  object  of  the  act  authorizing  limited 
partnerships  was  to  encourage  those  having  capital  to  become  partners 
with  those  having  skill,  by  limiting  the  liability  of  the  former  to  the 
amount  actually  contributed  to  the  firm.  The  next  and  incidental 
object  was  to  furnish  reasonable  protection  to  those  dealing  with  the 
concern  by  requiring  certain  acts  to  be  done  and  public  notice  thereof 
given,  so  that  all  who  desired  might  know  the  essential  features  of 
the  arrangement.  In  order  to  prevent  evasion  and  fraud,  it  was 
provided  that  any  false  statement  in  the  certificate  of  affidavit  should 
render  all  the  partners  equally  liable.  That  provision,  however, 
was  not  designed  as  a  trap  to  catch  the  innocent  and  unwary,  but  as 
a  bar  to  shut  out  the  dishonest  and  fraudulent.  While  the  courts 
were  at  first  inclined  to  a  strict  construction  against  those  thus  seeking 
exemption  from  the  common-law  liability  of  partners,  the  tendency 
in  this  state  is  now  toward  a  liberal  construction,  so  as  to  accomplish 
the  wise  purpose  of  the  act  by  uniting  capital  and  labor  in  business 
enterprises,  without  excessive  hazard  to  the  former. 

The  more  recent  cases  regard  the  statute  as  remedial  in  nature, 
and,  looking  to  substance  rather  than  form,  protect  those  who,  in 
good  faith,  substantially  comply  with  the  essential  requirements. 


NATURE  AND  CHARACTERISTICS  OF  FORMS  291 

We  now  have  a  case  before  us  where  nothing  of  substance  was  omitted. 
The  defect  complained  of  neither  misled  nor  injured  the  creditors 
who  seek  to  take  advantage  of  it.  Payment  having  been  made  in  the 
usual  way  practiced  by  business  men,  who  regard  a  check  with-ade- 
quate  funds  behind  it  as  cash,  an  affidavit  was  made  accordingly, 
and  the  good  faith  of  the  affiant  is  questioned  by  no  one.  There 
was  no  intentional  violation  of  the  statute,  and  the  failure  in  literal 
compliance  consisted  of  the  fact  that  the  affidavit  was  not  technically 
true  when  made,  although  both  affidavit  and  certificate  were  true 
when  filed.  The  exact  question,  therefore,  presented  for  decision  is 
whether  there  is  substantial  compliance,  if  the  affidavit  and  certificate 
are  true  when,  for  the  first  time,  use  is  made  of  them  for  a  purpose 
contemplated  by  the  statute  ? 

The  organization  of  the  firm  is  completed  by  the  filing  of  these 
papers,  for  the  omission  of  the  clerk  to  record  was  held  in  the  case 
last  cited  not  to  affect  the  liability  of  the  special  partner.  The  date 
of  this  culminating  act,  therefore,  is  of  the  highest  consequence, 
because  it  is  the  time  when  the  firm  becomes  ready  for  business,  and 
when  the  safeguards  should  exist  that  are  designed  to  protect  third 
parties.  As  was  well  said  in  a  recent  case: 

It  is  the  act  of  filing  the  certificate  and  affidavit  which  gives  life  to  the 
partnership  and  confers  immunity  for  the  debts  of  the  firm  upon  the  special 
partner,  and  from  that  moment  those  who  deal  with  the  partnership  become 
entitled  to  know  the  truth  as  to  its  formation,  and  from  and  after  that  time 
a  wrong  is  done  to  those  who  deal  with  it,  if  a  false  statement  is  published 
through  the  filing  of  the  certificate.  The  truth  of  the  statements  contained 
in  the  certificate  is  to  be  determined,  therefore,  at  the  time  of  its  being 
filed  with  the  county  clerk.  If  true  at  the  instant  of  riling,  there  is  no 
liability,  because,  being  true  at  the  instant  of  the  creation  of  the  limited 
partnership,  they  fulfill  the  purpose  for  which  the  law  was  enacted.  [Ropes 
v.  Colgate,  17  Abb.  [N.C.],  136.] 

We  adopt  this  language  as  applicable  to  the  case  in  hand,  and  extend 
it,  in  view  of  the  circumstances  already  stated,  to  the  affidavit  filed 
with  the  certificate.  In  reaching  this  conclusion,  we  are  guided  by 
the  object  of  the  legislature  in  passing  the  statute,  which  should  not 
be  defeated  by  exalting  the  letter  and  subverting  the  spirit.  The 
formation  of  limited  partnerships  should  not  be  made  difficult  or 
dangerous  by  technical  construction.  If  every  statement  contained 
in  the  papers  required  to  be  filed  is  true  at  the  time  of  filing, 
nothing  further  is  necessary  for  the  protection  of  creditors,  who  are 


292  LAW  AND  BUSINESS 

thus  given  all  the  information  that  it  was  the  policy  of  the  statute  to 
furnish.  More  than  this  should  not  be  exacted  in  the  absence  of  an 
actual  intent  to  deceive.  As  the  special  partner  cannot  make  the 
affidavit  himself  (sec.  7),  he  should  be  protected  if  it  is  true  when  filed, 
as  that  is  the  first  use  that  is  made  of  it,  and  the  occasion  when  he  is 
first  charged  with  the  duty  of  examining  it.  It  is  then  that  it  becomes 
material  and  then  that  it  must  be  true,  at  the  peril  of  general  liability 
if  it  is  untrue.  If  upon  then  examining  it  he  found  its  contents  were 
true,  it  would  be  a  harsh  and  unreasonable  rule  to  require  him  to 
ascertain,  if  he  could,  the  precise  date  when  the  check  was  cashed  or 
certified,  and  comparing  it  with  the  date  of  the  jurat,  to  decide,  at 
the  peril  of  losing  all  he  had,  which  date  preceded  the  other.  The 
affidavit  is  simply  evidence  of  the  facts  therein  stated,  and  if  those 
facts  are  true  when  such  evidence  is  first  used,  the  statute  is  satisfied, 
unless  some  furtive  purpose  existed  when  the  verification  was  made. 
If  any  business  had  been  done  between  the  making  and  filing,  or  if 
it  had  been  a  mere  artifice  to  evade  the  statute,  or  if  any  creditor 
had  been  misled  by  the  technical  inaccuracy  of  statement,  when  viewed 
from  the  date  of  the  jurat,  a  different  question  would  have  been  pre- 
sented from  that  now  before  us. 

Our  reasons  for  holding  that  the  affidavit  was  true  when  filed 
may  be  stated  in  a  few  words.  The  check  was  delivered  to  the  general 
partners  on  the  third,  certified  on  the  fourth,  deposited  to  the  credit 
of  the  firm  on  the  fifth,  before  the  papers  were  filed,  but  was  not  paid 
to  the  bank  where  it  was  deposited  until  the  sixth. 

The  general  rule  relating  to  payment  of  capital  by  the  special 
partner,  as  stated  by  Mr.  Bates  in  his  work  on  Limited  Partnerships, 
section  45,  is  that  "the  fund  must  be  in  existence  in  money  and  in 
the  sole  control  of  the  general  partner  on  the  day  the  partnership 
is  formed,  free  from  all  contingencies  except  those  arising  from  the 
proper  business  of  the  concern."  This  is  in  substantial  accord  with 
the  authorities,  which  hold  that  payment  in  goods,  notes,  or  even 
government  bonds,  worth  more  than  par,  is  insufficient. 

We  think  that  where  the  money  is  actually  in  the  bank  to  the 
credit  of  the  special  partner,  and  he  gives  absolute  and  final  control 
of  it  to  the  general  partner,  it  should  be  regarded  as  a  payment  in 
cash.  The  delivery  of  a  certified  check  to  the  payee  has  this  effect. 
(Clewes  v.  Bank  of  New  York,  etc.,  89  N.Y.  418;  Meads  v.  Merchants' 
Bank  of  Albany,  25  id.  143;  Farmers  and  Mechanics'  Bank  v.  Backers 
and  Drovers'  Bank,  16  N.Y.  125.) 


NATURE  AND  CHARACTERISTICS  OF  FORMS  293 

While  the  check  in  question  was  delivered  by  the  special  partner 
on  the  third  without  certification,  it  was  presented  to  the  bank  by 
the  general  partner  on  the  fourth,  and  certified  while  in  his  hands. 
In  other  words,  when  it  was  in  his  power  to  obtain  cash  on  the  check, 
he  procured  it  to  be  certified  instead  of  paid,  which,  as  between  the 
firm  and  the  special  partner,  was  a  payment,  and  discharged  the 
latter  from  liability  on  the  check.  (First  National  Bank  of  Jersey 
City  v.  Leach,  52  N.Y.  350.)  On  the  same  day  the  bank  charged  the 
amount  of  the  check  to  the  special  partners  on  their  bank  book  and 
deducted  it  from  the  balance  to  their  credit.  Thus  the  special 
partners  lost  control  of  the  money,  the  general  partners  obtained 
control  of  it,  and  there  was  an  absolute,  final,  irrevocable  appropriation 
of  it  to  the  use  of  the  firm  on  the  fourth,  or  the  day  before  the  certifi- 
cate and  affidavit  were  filed. 

We  think  that  the  exception  taken  by  the  defendants  requires  a 
new  trial. 

Judgment  reversed. 
QUESTIONS  ' 

1.  What  was  the  organization  under  consideration  in  the  principal  case? 
How  does  it  differ  from  an  ordinary  partnership?  from  a  joint-stock 
company  ?  from  a  partnership  ? 

2.  What  is  the  purpose  of  legislation  creating  limited  partnerships?    How 
are  the  provisions  of  such  legislation  usually  construed  ? 

3.  A,  B,  and  C,  trustees,  organize  a  realty  trust  company  for  the  purpose 
of  investing  and  reinvesting  money  for  profit  in  real  estate.    They  receive 
money  from  various  contributors  to  be  held  in  trust  for  the  purpose 
mentioned  and  issue  to  them  certificates  of  shares  in  the  trust.     By  the 
declaration  of  trust,  which  the  trustees  sign,  the  management  of  the 
affairs  of  the  business  is  vested  absolutely  in  the  trustees;   the  trustees 
are  self -perpetuating;   they  are  to  pay  dividends  to  the  owners  of  the 
shares  when  they  see  fit;   the  trustees  are  responsible  for  the  debts  of 
the  concern  to  the  extent  of  the  trust  fund,  but  neither  trustees  nor 
contributors  are  personally  responsible  for  such  debts;    the  shares  in 
the  trust  fund  are  transferable  by  their  owners  with  certain  named 
restrictions,     (a)   What   kind   of  business   organization   is   this?     (6) 
Discuss  its  legality. 

HENDREN  v.  WING 
60  Arkansas  Reports  561  (1895) 

RIDDICK,  J.  The  Arkansas  Machinery  &  Supply  Co.  is  not  a 
corporation,  but  it  is  the  business  name  of  a  firm  of  partners.  The 
question  for  us  to  determine  is  whether  a  chattel  mortgage,  executed 


294  LAW  AND  BUSINESS 

to  it  as  such  partnership,  is  valid  at  law.  The  decisions  in  regard  to 
transfers  of  real  estate  to  partnerships  are  based  on  the  old  rule  that 
"a  partnership,  as  such,  cannot  at  law  be  the  grantee  in  a  deed,  or 
hold  real  estate."  Percifull  v.  Platt,  36  Ark.  464.  This  rule  does 
not  apply  to  personal  property.  On  the  contrary,  a  partnership, 
as  such,  can  at  law  be  the  vendee  in  a  bill  of  sale  or  other  conveyance 
of  personal  property.  The  custom  of  the  country  teaches  us  that 
this  is  so.  The  business  of  the  country  is  largely  carried  on  by  partners 
under  partnership  names,  which  frequently  do  not  contain  the  name 
of  any  person.  Vast  quantities  of  personal  property  of  all  kinds  are 
contracted  for,  bought,  and  sold  by  such  firms  under  their  firm  names 
each  year,  and  their  right  thus  to  buy  and  sell  goes  unchallenged. 
A  consideration  of  this  fact  shows  that  there  is  a  wide  distinction 
between  the  rights  of  partnerships  at  law  in  regard  to  the  buying  and 
selling  of  personal  property  and  the  restrictions  which  prevail  there 
in  regard  to  transfers  of  real  estate. 

A  mortgage  is  only  a  conveyance  for  the  purpose  of  securing  a 
debt.  If  a  bill  of  sale  conveying  personal  property  to  a  partnership 
by  its  firm  name  is  valid,  we  see  no  reason  why  a  mortgage  of  personal 
property  to  a  partnership  should  not  be  upheld  under  like  circum- 
stances. It  is  true  that  the  statute  requires  certain  formalities  in 
regard  to  acknowledging  and  recording  mortgages  in  order  to  give 
notice  to  third  parties.  But  there  is  nothing  in  the  statute  which 
renders  invalid  mortgages  of  personal  property  executed  to  a  partner- 
ship in  its  firm  name.  Such  a  conveyance  to  a  firm  is  just  as  effectual 
as  if  the  name  of  each  partner  had  been  set  out  in  the  mortgage. 
Henderson  v.  Gates,  52  Ark.  371;  Kellogg  v.  Olsen,  34  Minn.  103; 
By  am  v.  Bickford,  140  Mass.  32;  Brunson  v.  Morgan,  76  Ala.  593; 
Chicago  Lumber  Co.  v.  Ashworth,  26  Kas.  212. 

We  therefore  conclude  that  the  judgment  of  the  circuit  court  in 
regard  to  the  validity  of  the  mortgage  was  correct,  and  it  is  affirmed. 

QUESTIONS 

1.  What  was  the  issue  under  consideration  in  this  case?    How  was  it 
decided  ?    What  rule  of  law  can  be  deduced  from  the  decision  ? 

2.  Would  the  decision  have  been  the  same  in  this  case  if  the  mortgage  in 
question  had  been  a  mortgage  upon  the  firm  realty  ? 

3.  A  and  B  are  partners  doing  business  under  the  firm  name  of  the  A 
Company.     They  buy  wheat  in  the  firm  name  for  the  firm.     Is  the 
transaction  valid  ?     To  whom  does  title  to  the  wheat  pass  ? 


NATURE  AND  CHARACTERISTICS  OF  FORMS  295 

4.  A  and  B  are  carrying  on  a  partnership  business  under  the  firm  name  of 
the  Southside  Express  Co.  They  buy  a  horse  with  firm  money  for 
firm  uses.  Is  the  transaction  valid  ?  To  whom  does  title  to  the  horse 
pass? 

WOODWARD  v.  McADAM 

•  10 1  California  Reports  438  (1894) 

PATERSON,  J.  This  is  an  action  on  a  negotiable  promissory  note 
secured  by  a  mortgage  given  by  the  defendant  McAdam  to  Shoobert, 
Beale  &  Co.,  and  by  the  latter  assigned  to  this  plaintiff.  The  court 
below  granted  a  decree  of  foreclosure  as  prayed  for,  and  from  such 
decree  the  defendant  Jackson,  who  is  a  grantee  for  value  by  deed  from 
McAdam  given  subsequent  to  the  mortgage,  has  appealed. 

The  point  made  is  that  the  mortgagee  is  a  fictitious  person — that 
the  mortgage  having  been  made  to  a  partnership  doing  business 
under  a  fictitious  name,  creates  at  most  only  an  equity,  and  as  against 
a  subsequent  grantee  for  value  of  the  mortgagor  establishes  no  lien. 

There  is  no  doubt  that  a  partnership  is  not  a  person,  either  natural 
or  artificial,  and  it  cannot  at  law  be  the  grantee  in  a  deed  or  hold  real 
estate.  Legal  title  must  vest  in  some  person,  but  if  the  title  be  made 
to  all  the  partners  by  name,  they  hold  the  legal  title  as  tenants  in 
common.  In  equity,  however,  a  different  rule  prevails.  There  the 
real  purpose  for  which  the  property  was  acquired  is  considered,  and 
under  the  principles  of  trusts  the  court  will  regard  real  estate  held  for 
partnership  purposes  as  personal  property,  so  far  as  such  holding  may 
be  necessary  to  settle  the  equities  between  a  firm  and  its  creditors, 
or  between  the  partners  themselves.  None  of  the  latter  principles 
is  involved  in  this  action,  however. 

If  the  name  of  the  grantee  were  purely  fictitious,  that  is,  if  no 
person  were  named,  it  may  be  that  the  mortgage  would  be  void, 
although  there  is  respectable  authority  for  holding  that  a  mortgage 
may  be  enforced  in  the  firm  name.  (Foster  v.  Johnson,  39  Minn.  380.) 
In  the  case  at  bar  the  names  of  two  of  the  partners  appear  in  the 
firm  name.  There  is  an  important  distinction  to  be  drawn  between 
a  description  which  is  inherently  uncertain  and  indeterminate  and 
one  which  is  merely  imperfect  and  capable  of  different  applications. 

To  correct  the  one  is,  in  effect,  to  add  new  terms  to  the  instrument; 
while  to  complete  the  other  is  only  to  ascertain  and  fix  the  application  of 
terms  already  contained  in  it.  Indeed,  the  most  usual  and  perfect  descrip- 
tion of  the  grantee — that  which  gives  his  Christian  and  surname,  and  the 
town  in  which  he  lives — may  prove  to  be  imperfect,  as  others  bearing  both 


296  LAW  AND  BUSINESS 

those  names  may  be  living  in  the  same  town.  And  if  the  Christian  name 
or  place  of  residence  be  omitted  the  description  is  only  rendered  the  more 
imperfect;  it  is  less  certain  than  it  might  be,  and  usually  is,  made.  But  a 
grantee  is  still  designated,  though  imperfectly,  and  for  aught  that  the  deed 
discloses  the  party  accepting  the  conveyance  may  be  the  only  person  answer- 
ing the  description  given.  In  all  these  cases  a  resort  to  extraneous  facts 
and  circumstances  may  become  necessary,  in  order  to  ascertain  the 
individual  to  whom  the  description  was  intended  to  apply;  but  it  is  not 
perceived  that  the  greater  or  less  probability  of  this  should,  in  either  case, 
affect  the  validity  of  the  deed.  [Morse  v.  Carpenter,  19  Vt.  616.] 

In  Moreau  v.  Sa/arans,  3  Sneed,  599,  67  Am.  Dec.  582,  it  was  held 
that  real  estate  purchased  by  partners  is  to  be  regarded  in  respect  to 
the  legal  title  as  an  estate  held  by  them  as  tenants  in  common,  but 
subject  to  a  trust  for  the  benefit  of  the  partnership  until  the  partner- 
ship accounts  are  settled,  and  that  a  conveyance  to  "J.  L.  Saffarans 

6  Co."  would  operate  to  invest  John  L.   Saffarans,  individually, 
with  the  entire  legal  title,  but  that  in  equity  he  would  be  treated  as 
holding  the  legal  title  in  trust  for  the  benefit  of  the  partnership. 
In  Menage  v.  Burke,  43  Minn.  212,  the  court  sustained  a  mortgage 
of  real  estate  to  "Farnham  and  Lovejoy, "  as  legally  sufficient  as  a 
mortgage  to  Sumner  W.  Farnham  and  James  A.  Lovejoy,  it  appearing 
that  said  persons  constituted  the  firm  of  Farnham  and  Lovejoy. 
In  Foster  v.  Johnson,  39  Minn.  380,  the  court  explained  Tidd  v. 
Rines,  26  Minn.  201,  cited  by  appellant,  and  held  that  in  an  action 
to  foreclose  a  mortgage  it  was  no  objection  that  the  mortgage  ran  to 
a  partnership  in  its  firm  name.     In  Holmes  v.  Jarrett,  Moon  6°  Co. 

7  Heisk,  506,  the  court  held  that  where  the  deed  was  made  to  Jarrett, 
Moon  &  Co.,  and  it  did  not  appear  whether  the  firm  was  composed 
of  Jarrett,  Moon  and  others,  or  Jarrett  Moon  and  others,  in  trust  for 
the  partnership,  and  that  the  uncertainty  arising  from  the  omission 
of  the  Christian  names  of  the  grantees  could  be  removed  by  parol 
proof.     (See  also,  Brunson  v.  Morgan,  76  Ala.  594.)     In  Winter  v. 
Stock,  29  Cal.  407,  89  Am.  Dec.  57,  it  was  held  that  a  conveyance 
of  land  to  L.  B.  &  Co.  vests  the  legal  title  of  the  same  in  L.  B.  alone, 
and  that  his  deed  would  give  to  his  grantee  a  good  and  valid  title. 

The  judgment  is  affirmed. 
QUESTIONS 

1.  How  did  the  controversy  arise  in  this  case?    What  issue  was  presented 
for  decision  ?    How  was  it  decided  ? 

2.  A,  B,  and  C  are  partners  doing  business  under  the  firm  name  of  A  and 
B  Company.    They  purchase  a  tract  of  land  from  P  for  the  firm.     The 


NATURE  AND  CHARACTERISTICS  OF  FORMS  297 

deed  of  conveyance  runs  to  "A  and  B  Company,  a  partnership  composed 
of  A,  B,  and  C."  Is  the  conveyance  valid?  To  whom  does  the  title 
pass? 

3.  In  the  foregoing  case,  the  deed  of  conveyance  runs  to  "A  and  B  Company, 
a  partnership."    Discuss  the  legal  effect  of  the  transaction. 

4.  A,  B,  and  C  are  partners  doing  business  under  the  firm  name  of  the 
Southside  Express  Co.     They  purchase  a  tract  of  land  for  firm  uses. 
The  deed  of  conveyance  runs  to  the  "Southside  Express  Co.,  a  partner- 
ship composed  of  A,  B,  and  C."    Discuss  the  legal  effect  of  the  deed. 

5.  The  deed  runs  to  the  "Southside  Express  Co.,  a  partnership."    Discuss 
the  legal  effect  of  the  deed. 

6.  Is  there  any  good  reason  why  a  firm  should  not  be  permitted  to  acquire 
and  hold  real  property  in  a  fictitious  name  ? 

WOOD  v.  AMERICAN  FIRE  INSURANCE  COMPANY 

149  New  York  Reports  382  (1896) 

Appeal  from  the  judgment  of  the  General  Term  of  the  Supreme 
Court  affirming  a  judgment  for  the  plaintiff. 

O'BRIEN,  J.  The  plaintiff  recovered  upon  a  policy  of  insurance, 
of  which  she  was  the  assignee,  issued  by  the  defendant,  upon  a 
building  used  as  a  store,  January  9,  1891,  and  was  destroyed  by  fire 
March  31,  1891.  The  only  defenses  interposed  by  the  answer,  which 
were  proved  and  found  at  the  trial,  were:  (i)  That  Wood  Brothers, 
a  firm  composed  of  six  brothers,  which  owned  the  property  and  pro- 
cured the  insurance,  had  not,  at  the  time,  the  sole  and  unconditional 
title  or  ownership  of  the  property,  and  (2)  that  the  property  covered 
by  the  policy  had  been  sold  upon  judgment  and  execution  against  the 
firm  some  days  before  the  loss.  The  contract  was  made  by  means 
of  what  is  known  as  the  standard  policy,  which  contained  the  condition 
that  it  "shall  be  void  if  the  interest  of  the  insured  shall  be  other  than 
unconditional  and  sole  ownership,  or  if  any  change,  other  than  by  the 
death  of  an  assured,  takes  place  in  the  interest,  title  or  possession 
of  the  subject  of  the  insurance,  whether  by  legal  process  or  judgment, 
or  by  the  voluntary  act  of  the  insured  or  otherwise." 

With  respect  to  the  defense  first  referred  to,  it  appeared  that  in 
the  year  1885,  one  of  the  individuals  composing  the  firm  made  a 
general  assignment  of  his  individual  property  for  the  benefit  of  his 
creditors,  and  also  his  interest  in  the  firm.  That  in  1888  his  assignee 
sold  whatever  interest  in  the  firm  property  that  passed  to  him  by 
the  assignment  to  a  third  party,  and  before  the  policy  was  issued  had 
accounted  and  been  discharged.  The  assignee  had  no  accounting  with 


298  LAW  AND  BUSINESS 

the  firm  in  order  to  ascertain  what  interest  the  assignor  had,  if  any, 
in  the  surplus,  and  no  claim  was  ever  made  upon  the  firm  for  anything 
passing  by  the  assignment.  It  appeared  by  the  proofs  and  findings 
that  the  defendant's  agents,  who  were,  as  may  be  fairly  inferred, 
general  agents,  knew,  at  the  time  of  issuing  the  policy,  and  before, 
all  the  facts  and  circumstances  with  respect  to  the  individual  assign- 
ment and  the  transfer  of  that  interest  as  above  stated. 

The  answer  to  the  defense,  based  upon  these  facts,  is  twofold: 
(i)  That  since  the  title  to  the  real  estate  held  by  a  partnership  is  in 
the  firm,  and  not  in  the  individual  members  of  it,  the  transfer  of  the 
interest  of  one  of  the  members,  before  the  insurance,  had  no  effect 
upon  the  unconditional  and  sole  ownership  of  the  firm.  (2)  That  an 
assignment  by  one  partner  of  his  share  in  the  partnership  stock  simply 
transfers  any  interest  he  may  have  in  any  surplus  remaining  after  pay- 
ment of  the  firm  debts  and  the  settlement  of  the  firm  accounts.  Whether 
the  purchaser  of  such  an  interest  takes  anything  whatever  by  the 
transfer  cannot  be  known  until  all  the  partnership  affairs  have  been 
settled  and  adjusted.  Menagh  v.  Whitwell,  52  N.Y.  146,  n  Am.  Rep. 
683.  The  title  to  the  real  property,  which  was  the  subject  of  the  insur- 
ance, was  in  the  partnership  firm,  and  was  not  affected  by  the  assign- 
ment of  one  of  the  members.  It  still  remained  firm  property,  since  the 
assignee  had  no  interest  in  it  as  such,  and  whether  the  sale  or  transfer 
by  the  individual  member  was  anything  more  than  a  mere  form,  or 
conveyed  anything  to  the  assignee,  must  depend  upon  the  existence 
of  a  surplus  after  the  partnership  affairs  are  adjusted.  It  does  not 
even  appear  in  this  case  that  there  would  then  be  any  surplus  to 
divide,  though  that  circumstance  cannot  be  regarded  as  material 
upon  the  question  whether  such  a  transfer  by  a  member  affects  or 
changes  the  estate  or  interest  which  the  firm  has  in  the  partnership 
realty. 

The  judgment  must,  therefore,  be  affirmed  with  costs. 

QUESTIONS 

1.  Are  partners  tenants  in  common  of  firm  property?    Are  they  joint - 
tenants  ? 

2.  A  and  B  have  been  engaged  in  business  as  partners.    The  firm  owns  real 
and  personal  property.     What  are  the  rights  of  the  partners  with  respect 
to  the  firm  property  upon  dissolution  of  the  firm  ? 

3.  A  demands  that  the  property  be  divided  in  kind  upon    dissolution. 
Is  he  entitled  to  such  a  division  ? 


NATURE  AND  CHARACTERISTICS  OF  FORMS  299 

4.  A  transfers  his  interest  in  the  firm  to  C.    What  is  the  legal  effect  of  this 
transfer  ?    What  rights  does  C  get  by  the  transfer  ? 

5.  S  owns  stock  in  a  corporation  which  owns  real  and  personal  property. 
What  is  the  nature  of  his  rights  with  respect  to  the  corporate  property.? 
Is  he  entitled  to  a  division  of  the  property  in  kind  upon  dissolution  of 
the  corporation  ? 

6.  S  is  the  sole  stockholder  in  a  certain  corporation.     Is  he  owner  of  the 
property  of  the  corporation  ?     Can  he  sell  such  property  ?     Can  it  be 
levied  upon  by  creditors  as  property  of  S  ? 

ANDREWS'  HEIRS  v.  BROWN'S  HEIRS 
21  Alabama  Reports  437  (1852) 

DARGAN,  C.  J.  When  a  partnership  is  dissolved  by  the  death  of 
one  or  more  of  the  partners,  the  legal  title  to  all  the  personal  property 
and  choses  in  action  belonging  to  the  firm  becomes  vested  exclusively 
in  the  survivor;  not,  indeed,  for  his  own  peculiar  benefit,  but  for  the 
purpose  of  paying  the  debts,  and  then  dividing  the  net  balance 
among  those  entitled,  giving  to  the  representatives  of  the  deceased 
partner  the  same  interest  he  would  have  taken,  had  he  been  in  life, 
and  the  firm  had  been  dissolved,  not  by  death,  but  by  mutual  consent. 
But,  as  respects  real  property,  the  case  is  different  at  law;  for 
the  legal  title  descends  to  the  heir  at  law  of  the  deceased  partner, 
and  a  court  of  law,  looking  to  the  legal  title  alone,  cannot  regard  or 
protect  the  mere  equities  of  others.  In  a  court  of  equity,  however, 
real  estate  belonging  to  the  firm  is  considered  as  personal  property, 
to  this  extent,  at  least,  that  it  is  liable  to  pay  the  debts  of  the  firm, 
and  then  to  distribution  between  the  partners,  in  the  same  manner 
as  if  it  had  been  personal  instead  of  real  estate.  These  charges  upon 
the  real  estate,  being  prior  to  the  claims  of  the  representatives  of  the 
deceased  partner,  override  his  wife's  title  to  dower,  as  well  as  the  title 
of  his  heir  at  law.  The  consequence  is  that  the  heir  at  law  holds 
the  legal  title  subservient  to,  or  in  trust  for,  the  surviving  partners, 
who  is  charged  with  the  payment  of  the  debts.  These  principles  of 
law,  in  my  opinion,  are  so  well  settled,  that  they  are  not  longer  the 
subject  of  controversy.  Story  on  Part.  127,  et.  seq.;  Collyer  on 
Partnership  (Perkins'  ed.)  183  to  145;  5  Ala.  446;  Pierce  v.  Trigg, 
Leigh  406;  Delmonico  v.  Guellaume  et  al.  2  Sand.  Ch.  366;  Dyer  v. 
Clarke,  5  Mete.  562;  7  Vesey,  425;  5  Hare,  369. 

Inasmuch  as  the  real  estate  is  considered  as  personal,  for  the 
purpose  of  paying  the  debts  of  the  firm,  and  the  surviving  partner 


300  LAW  AND  BUSINESS 

is  charged  with  the  duty  of  paying  those  debts,  it  must,  of  necessity, 
follow,  that  he  has  the  right  in  equity  to  dispose  of  the  real  estate  for 
this  purpose;  for  it  would  never  do  to  charge  him  with  the  duty  of 
paying  the  debt,  and  at  the  same  time  to  take  from  him  the  means  of 
doing  it.  Therefore,  although  he  cannot,  by  his  deed,  pass  the  legal 
title  to  the  purchaser,  which  descended  to  the  heir  of  the  deceased 
partner,  yet,  as  the  heir  holds  the  title  in  trust  to  pay  the  debts,  and 
the  survivor  is  charged  with  his  duty,  his  deed  will  convey  this  equity 
to  his  purchaser,  and  through  it,  he  may  call  on  the  heir  for  the 
legal  title,  and  compel  him  to  convey.  See  2  Sand.  Ch.  366;  5 
Mete.  562,  supra. 

Applying  these  principles  to  the  facts  exhibited  by  the  pleadings 
and  proof  in  the  case  before  us  (but  which  we  will  not  state  in  detail 
in  this  opinion),  we  can  perceive  no  error  in  the  decree;  for  the  proof, 
we  think,  is  abundant  to  show  that,  although  the  legal  title  to  the 
lands  was  held  by  E.  L.  Andrews,  alone,  nevertheless  they  belonged 
to  the  firm  as  partnership  property,  and  were  so  treated  by  all  the 
members  of  the  firm.  They  never  did  belong  exclusively  to  E.  L. 
Andrews;  consequently,  the  claims  of  the  creditors  of  the  firm  are 
superior  to  his  widow's  right  of  dower,  as  well  as  to  the  legal  title  of 
his  heirs  at  law.  The  lands  were  purchased  with  the  funds  of  E.  L. 
and  Z.  Andrews,  who  were  then  partners,  and  stood  upon  their  books 
as  partnership  property,  and  when  the  new  firm  was  formed,  composed 
of  E.  L.  and  Z.  Andrews  and  Thomas  G.  Brown,  these  lands  were 
carried  into  the  new  firm  as  part  of  its  capital,  and  were,  therefore, 
partnership  property. 

As  to  the  stocks  purchased  with  the  funds  of  the  new  firm,  it  is 
very  clear  that  they  also  are  subject  to  the  control  and  disposition 
of  the  surviving  partner,  Brown,  notwithstanding  they  stand  on  the 
books  of  the  bank  and  the  insurance  company  in  the  name  of  E.  L. 
Andrews  alone.  In  reference  to  the  money  received  by  Messrs. 
Campbell  and  Chandler,  growing  out  of  the  redemption  of  one  of  the 
lots  by  Mr.  Gliddon,  we  think  it  should  stand  in  the  place  of  the  lot 
itself,  and,  consequently,  subject  to  the  disposition  made  by  Brown 
of  the  lot. 

We  are  satisfied  there  is  no  error  in  the  decree,  and  it  must  be 
affirmed. 

I  will  observe,  in  conclusion,  that  we  do  not  intend,  by  anything 
said  in  the  foregoing  opinion,  to  hold  that  a  surviving  partner  is 
authorized  to  sell  real  estate  for  the  simple  purpose  of  making  distribu- 


NATURE  AND  CHARACTERISTICS  OF  FORMS  301 

tion  among  the  partners  themselves,  and  their  representatives. 
That  question  is  not  raised  in  the  case,  and  has  not  been  considered; 
we  only  intend  to  decide  this:  the  firm  being  insolvent,  the  surviving 
partner  may  dispose  of  the  whole  property  to  pay  the  debts,  whether 
the  property  consists  of  real  or  personal  estate. 

The  decree  is  affirmed. 

QUESTIONS 

1.  Smith  and  Brown,  partners,  own  a  considerable  amount  of  personal 
property.     Smith  dies.    To  whom  does  the  title  to  the  personal  property 
pass  ?    How  is  it  administered  after  the  death  of  Smith  ? 

2.  Smith  purchases  two  horses  in  his  own  name  for  the  firm.    At  his  death 
to  whom  does  title  to  the  horses  pass  ? 

3.  Smith  and  Brown  jointly  hold  title  to  firm  realty.     Upon  the  death  of 
Smith  to  whom  does  the  title  to  the  realty  pass  ?     How  is  it  administered 
in  the  settlement  of  the  affairs  of  the  firm  ? 

4.  Brown  holds  title  to  firm  realty  in  his  individual  name.     Upon  his  death 
to  whom  does  title  to  realty  pass  ?    How  is  it  administered  ? 

5.  Is  the  doctrine  of  the  principal  case  applicable  generally  in  the  settlement 
of  the  affairs  of  a  partnership  or  only  when  the  firm  is  insolvent  ? 

6.  S  is  the  owner  of  ten  shares  of  stock  in  a  corporation  which  owns  nothing 
but  real  property.    Upon  the  death  of  S,  to  whom  does  the  title  to  the 
stock  pass  ? 

BUTTON  r.  HOFFMAN 

6 1  Wisconsin  Reports  20  (1884) 

ORTON,  J.  This  is  an  action  of  replevin  in  which  the  title  of  the 
plaintiff  to  the  property  was  put  in  issue  by  the  answer. 

In  his  instructions  to  the  jury  the  learned  judge  of  the  circuit 
court  said:  "I  think  that  the  testimony  is  that  the  plaintiff  had  the 
title  to  the  property."  The  evidence  of  the  plaintiff's  title  was  that 
the  property  belonged  to  a  corporation  known  as  "The  Hayden  & 
Smith  Manufacturing  Co.,"  and  that  he  purchased  and  became 
the  sole  owner  of  all  the  capital  stock  of  said  corporation.  As  the 
plaintiff  in  his  testimony  expressed  it,  "I  bought  all  the  stock, 
I  own  all  the  stock  now.  I  became  the  absolute  owner  of  the  mill. 
It  belonged  at  that  time  to  the  company,  and  I  am  the  company." 
There  was  no  evidence  of  the  condition  of  the  corporation  at  the  time. 
Is  this  sufficient  evidence  of  the  plaintiff's  title?  We  think  not. 
The  learned  counsel  of  the  respondent  in  his  brief  says:  "The  property 
had  formerly  belonged  to  the  Hayden  &  Smith  Manufacturing  Co., 


302  LAW  AND  BUSINESS 

but  the  respondent  had  purchased  and  become  the  owner  of  all  the 
stock  of  the  company,  and  thus  became  its  sole  owner." 

From  the  very  nature  of  a  private  business  corporation,  or,  indeed, 
of  any  corporation,  the  stockholders  are  not  the  private  and  joint 
owners  of  its  property.  The  corporation  is  the  real,  though  artificial 
person,  substituted  for  the  natural  persons  who  procured  its  creation 
and  have  pecuniary  interests  in  it,  in  which  all  its  property  is  vested, 
and  by  which  it  is  controlled,  managed,  and  disposed  of.  It  must 
purchase,  hold,  grant,  sell,  and  convey  the  corporate  property,  and 
do  business,  sue  and  be  sued,  plead  and  be  impleaded,  for  corporate 
purposes,  by  its  corporate  name.  The  corporation  must  do  its  busi- 
ness in  a  certain  way,  and  by  its  regularly  appointed  officers  and 
agents,  whose  acts  are  those  of  the  corporation  only  as  they  are  within 
the  powers  and  purposes  of  the  corporation.  In  an  ordinary  copartner- 
ship the  members  of  it  act  as  natural  persons  and  as  agents  for  each 
other,  and  with  unlimited  liability.  But  not  so  with  a  corporation; 
its  members,  as  natural  persons,  are  merged  in  the  corporate  identity. 
Ang.  &  A.  on  Corp.,  sections  40,  46,  100,  591,  595.  A  share  of  the 
capital  stock  of  a  corporation  is  defined  to  be  a  right  to  partake, 
according  to  the  amount  subscribed,  of  the  surplus  profits  obtained 
from  the  use  and  disposal  of  the  capital  stock  of  the  company  to  those 
purposes  for  which  the  company  is  constituted.  Id.  section  557. 
The  corporation  is  the  trustee  for  the  management  of  the  property, 
and  the  stockholders  are  the  mere  cestuis-que-trust.  Gray  v.  Portland 
Bank,  3  Mass.  365;  Eidman  v.  Bowman,  4  Am.  Corp.  Cas.  350. 
The  right  of  alienation  or  assignment  of  the  property  is  in  the  corpora- 
tion alone,  and  this  right  is  not  affected  by  making  the  stockholders 
individually  liable  for  the  corporate  debts.  Ang.  &  A.  on  Corp., 
section  191;  Pope  v.  Brandon,  2  Stewart  (Ala.)  401;  Whtiwell  v. 
Warner,  20  Vt.  444.  The  property  of  the  corporation  is  the  mere 
instrument  whereby  the  stock  is  made  to  produce  the  profits,  which 
are  the  dividends  to  be  declared  from  time  to  time  by  corporate  author- 
ity for  the  benefit  of  the  stockholders,  while  the  property  itself, 
which  produces  them,  continues  to  belong  to  the  corporation.  Bradley 
v.  Holdsworth,  3  Mees.  &  W.  422;  Waltham  Bank  v.  Waltham,  10 
Met.  334;  Tippets  v.  Walker,  4  Mass.  595.  The  corporation  holds 
its  property  only  for  the  purposes  for  which  it  was  permitted  to  acquire 
it,  and  even  the  corporation  cannot  divert  it  from  such  use,  and  a 
shareholder  has  no  legal  right  to  it,  or  the  profits  arising  therefrom, 
until  a  lawful  division  is  made  by  the  directors  or  other  proper  officers 


NATURE  AND  CHARACTERISTICS  OF  FORMS  303 

of  the  corporation,  or  by  judicial  determination.  Ang.  &  A.  on 
Corp.,  sections  160,  190,  557;  Hyatt  v.  Allen,  4  Am.  Corp.  Cas.  624. 
A  conveyance  of  all  the  capital  stock  to  a  purchaser  gives  to  such 
purchaser  only  an  equitable  interest  in  the  property  to  carry  on  busi- 
ness under  the  act  of  incorporation  and  in  the  corporate  name,  and 
the  corporation  is  still  the  legal  owner  of  the  same.  Wilde  v.  Jenkins, 
4  Paige,  481.  A  legal  distribution  of  the  property  after  a  dissolution 
of  the  corporation  and  settlement  of  its  affairs,  is  the  inception  of  any 
title  of  a  stockholder  to  it,  although  he  be  the  sole  stockholder. 
Ang.  &  A.  on  Corp.,  section  7790. 

These  general  principles  sufficiently  establish  the  doctrine  that 
the  owner  of  all  the  capital  stock  of  a  corporation  does  not  therefore 
own  its  property,  or  any  of  it,  and  does  not  himself  become  the 
corporation,  as  a  natural  person,  to  own  its  property,  and  do  its  busi- 
ness in  his  own  name.  While  the  corporation  exists  he  is  a  mere 
stockholder  of  it,  and  nothing  else.  The  consequences  of  a  violation 
of  these  principles  would  be  that  the  stockholders  would  be  the  private 
and  joint  owners  of  the  corporate  property,  and  they  could  assume 
the  powers  of  the  corporation,  and  supersede  its  functions  in  its  use 
and  disposition  for  their  own  benefit  without  personal  liability,  and 
thus  destroy  the  corporation,  terminate  its  business,  and  defraud  its 
creditors.  The  stockholders  would  be  the  owners  of  the  property, 
and  at  the  same  time,  it  would  belong  to  the  corporation.  One 
stockholder  owning  the  whole  capital  stock  could,  of  course,  do  what 
several  stockholders  could  lawfully  do.  It  is  said  in  Utica  v.  Churchill, 
33  N.Y.  161,  "the  interest  of  a  stockholder  is  of  a  collateral  nature, 
and  is  not  the  interest  of  an  owner";  and  in  Hyatt  v.  Allen,  supra,  that 
a  "  shareholder  in  a  corporation  has  no  legal  title  to  its  property  or 
profits  until  a  division  is  made."  In  Winona  6°  St.  Paul  Railroad  Co. 
v.  St.  P.  &  S.  C.  Railroad  Co.,  23  Minn.  359,  it  is  held  that  the  corpora- 
tion is  still  the  absolute  owner,  and  vested  with  the  legal  title  of  the 
property,  and  the  real  party  in  interest,  although  another  party  has 
become  the  owner  of  the  sole  beneficial  interest  in  its  rights,  property 
and  immunities.  In  Baldwin  v.  Canfield,  26  Minn.  43,  it  was  held 
that  the  sole  owner  of  the  stock  did  not  own  the  land  of  the  corporation 
so  as  to  convey  the  same.  In  Bartlett  v.  Brickett,  14  Allen,  62,  an 
action  of  replevin  was  brought  by  A.,  B.,  and  C.,  as  the  " Trustees 
of  the  Ministerial  Fund  of  the  North  Parish  in  Haverhill,"  which  was 
the  corporate  name.  In  portions  of  the  writ  the  plaintiffs  were 
referred  to  as  "the  said  trustees"  and  "the  said  plaintiffs."  In  the 


304  LAW  AND  BUSINESS 

bond,  "A.,  B.,  and  C.,  trustees  as  aforesaid,"  became  bound,  and  the 
officer,  in  his  return,  certified  that  he  had  taken  a  bond  "from 
the  within-named  A.,  B.,  C.,  plaintiffs."  It  was  held  that  the  action 
was  not  by  the  corporation  as  it  should  have  been,  and  judgment  was 
rendered  for  the  defendant.  It  is  said  in  Van  Allen  v.  Assessors, 
3  Wall.  584,  "the  corporation  is  the  legal  owner  of  all  the  property 
of  the  bank,  both  real  and  personal."  In  Wilde  v.  Jenkins,  supra, 
where  a  copartnership  bought  all  the  property  and  effects,  together 
with  the  franchises,  of  a  corporation,  and  elected  themselves  trustees 
of  the  corporation,  it  was  held  that  the  corporation  was  not  dissolved 
and  that  the  legal  title  to  the  real  and  personal  property  was  still  in 
the  corporation  for  their  benefit.  In  Mickles  v.  R.  C.  Bank,  n 
Paige,  1 1 8,  it  was  held  that,  although  a  corporation  was  deemed  to 
have  surrendered  its  charter  for  non-user,  it  was  not  dissolved,  and 
would  not  be  until  its  dissolution  was  judicially  declared,  and  that 
until  then  its  property  could  be  taken  and  sold  by  its  judgment 
creditors.  In  Bennett  v.  Am.  Art  Union,  5  Sandf.  Super.  Ct.  614, 
it  was  held  that,  "as  a  general  rule,  the  whole  title,  legal  and  equitable 
(to  its  property),  is  vested  in  the  corporation  itself,"  and  that  the 
individual  members  have  no  other  or  greater  interest  in  it  than  is 
expressly  given  to  them  by  the  charter,  and  the  prayer  of  the  com- 
plainant, as  a  shareholder  in  the  Art  Union,  for  an  injunction  against 
a  certain  disposition  of  its  property,  was  denied,  because  he  had  no 
interest  in  it.  See  also,  Goodwin  v.  Hardy,  57  Me.  143. 

It  is  true  that  none  of  the  foregoing  cases  are  precisely  parallel 
with  the  present  case  in  facts,  but  they  are  sufficiently  analogous  to 
be  an  authority  upon  the  principle  that  the  plaintiff,  as  the  sole  stock- 
holder of  the  corporation,  is  not  the  legal  owner  of  its  property.  He 
may  have  an  equitable  interest  in  it,  but  in  this  action  he  must  show 
a  legal  title  to  the  property  in  himself  in  order  to  recover,  and  he  has 
shown  that  such  title  is  in  another  person.  Timp  v.  Dockham, 
32  Wis.  146;  Sensenbrenner  v.  Mathews,  48  Wis.  250.  In  analogy  to 
the  foregoing  principle  it  was  held  in  Murphy  v.  Hanrahan,  50  Wis. 
485,  that  the  sole  heirs  of  an  estate  did  not  have  such  a  legal  title  to 
a  promissory  note  given  to  their  father  as  would  entitle  them  to  sue 
the  maker  upon  it,  because  the  title  to  it  was  in  the  administrator, 
and  they  could  obtain  the  title  only  by  administration  and  distribution 
according  to  law.  The  heirs  in  that  case  certainly  had  as  much 
equitable  interest  in  that  note  as  this  plaintiff  has  in  the  property 
in  controversy.  The  want  of  title  to  the  property  being  fatal  to  the 


NATURE  AND  CHARACTERISTICS  OF  FORMS  305 

plaintiff's  recovery  in  the  action  between  the  present  parties,  other 
alleged  errors  will  not  be  considered. 

The  judgment  of  the  circuit  court  is  reversed,  and  the  cause 
remanded  for  a  new  trial. 

QUESTIONS 

1.  A  corporation,  of  which  A,  B,  and  C  own  all  the  stock,  purchases  a  tract 
of  land  in  its  corporate  name.     Discuss  the  legal  effect  of  the  transaction. 

2.  A,  B,  and  C  as  individuals  execute  a  conveyance  of  the  land  to  P.    Discuss 
the  legal  effect  of  the  transaction. 

3.  A  became  the  sole  stockholder  in  the  corporation  and  for  several  years 
conducted  the  business  as  an  individual.    During  this  time  he  made  a 
conveyance  of  the  land  in  his  own  name  to  P.    Later  on  the  corporation 
was  revived  and  made  a  conveyance  of  the  same  land  to  D  who  went 
into  possession  of  it.    P  sues  D  for  possession  of  the  land.    What 
decision  ? 

4.  D  stole  a  horse  from  the  corporation.    A,  one  of  the  stockholders  of 
the  corporation,  brings  an  action  to  recover  the  horse.     What  decision  ? 

BRACKEN  v.  KENNEDY 
4  Illinois  Reports  558  (1842) 

This  was  a  bill  in  chancery  filed  in  the  La  Salle  Circuit  Court,  by 
the  complainant  against  the  defendants,  for  an  accounting  among 
partners.  The  bill  states  that  in  July,  1837,  the  complainant  and 
defendants  entered  into  partnership  as  canal  contractors,  and,  as  such 
partners,  contracted  with  a  canal  company  in  Virginia,  for  the 
construction  of  section  120  of  their  canal,  and  that  they  completed 
said  section  120  in  August,  1838.  That  during  the  progress  of  the 
work,  the  complainant  and  Brady  had  the  principal  management  of 
its  construction,  while  most  of  the  time  Kennedy  was  absent.  That 
at  the  same  time  Kennedy  had  an  individual  contract  for  the  con- 
struction of  sections  118  and  119  of  the  same  canal,  and  Kennedy 
employed  the  complainant  to  superintend  the  completion  of  these 
sections.  That  this  individual  contract  of  Kennedy  was  unprofitable, 
and  in  the  course  of  its  progress,  he  became  indebted  to  the  copartner- 
ship, section  120,  to  about  $8,000,  for  work  and  labor  expended  on 
sections  118  and  119.  That  the  whole  estimate  for  the  company, 
section  120,  was  $32,320.90,  including  the  work  done  on  Kennedy's 
individual  sections,  and  that  the  costs  of  the  same  were  $23,783.82, 
leaving  a  balance  of  profits  to  be  divided  among  the  partners  of 
$8,437.08.  That  the  complainant  has  accounted  with,  and  paid  over 


306  LAW  AND  BUSINESS 

to  Brady  his  third  of  said  profits;  and  that  there  is  now  due  from 
Kennedy  to  the  complainant  the  sum  of  $3,959.03,  arising  from  said 
partnership  transactions.  That  Kennedy  has  drawn  estimates  on  the 
works,  and  has  drawn  his  last  on  his  individual  contracts.  That  no 
account  has  been  taken  or  rendered  between  the  said  partners,  and 
that  Kennedy  refuses  to  account.  The  bill  prays  that  an  account 
may  be  taken,  etc. 

To  this  bill  a  demurrer  was  filed,  which  was  sustained,  and  the 
bill  dismissed. 

CATON,  J.  In  matters  of  controversy  or  difficulty  between 
partners,  it  is  now  most  usual,  and  by  far  the  most  convenient,  to 
resort  to  a  court  of  equity  for  their  final  adjudication  and  settlement. 
The  practice  of  this  court  is  much  better  adapted  to  unravel,  and 
definitely  settle,  such  complicated  questions  as  frequently  arise  among 
partners  than  a  court  of  law;  and  it  is  now  one  of  the  most  usual 
proceedings  to  be  met  with  in  courts  of  equity.  It  is  not  unusual 
that  almost  the  entire  proof  of  the  merits  of  a  case  between  partners 
is  locked  up  in  the  bosoms  of  the  parties  themselves,  or  is  contained 
in  books  and  papers  in  the  possession  of  one  or  the  other  party,  and 
this  court  can  afford  the  only  key  to  the  disclosure  of  the  one,  or  the 
production  of  the  other.  Here,  either  party  may  compel  the  other 
to  purge  his  conscience  on  oath  and  declare  the  truth;  and  the 
court  will  compel  the  production  of  all  such  papers  and  books  as 
may  be  ncessary  to  elucidate  the  rights  or  liabilities  of  the  parties. 
It  is  for  this  reason,  also,  that  courts  of  equity  have  frequently 
exercised  a  concurrent  jurisdiction  with  courts  of  law,  in  long  and 
intricate  accounts,  running  on  both  sides,  between  parties  who  are 
not  partners,  and  have  no  interests  in  common. 

It  is  true  that  courts  of  law  still  pretend  to  afford  a  remedy  in 
case  of  difficulty  between  partners,  by  the  action  of  account,  but  it 
is  so  incomplete  and  unsatisfactory,  that  it  is  now  nearly  obsolete; 
and  the  complaining  partner  almost  universally  lays  his  complaint 
before  a  court  of  chancery,  where  he  finds  a  prompt  and  efficient 
remedy,  from  the  superior  facilities  which  it  possesses  of-  doing 
complete  justice  between  the  parties. 

In  a  bill  of  this  character,  the  existence  of  the  partnership,  the 
transaction  of  business  by  the  firm,  and  no  account  among  its  mem- 
bers, are  prominent  features  and  where  they  all  appear,  I  am  not 
prepared  to  say  that  the  bill  ought  not  in  all  cases  to  be  retained. 
In  this  case,  the  bill  shows  that  there  was  a  special  and  limited 


NATURE  AND  CHARACTERISTICS  OF  FORMS  307 

partnership,  the  particular  object  of  which  is  stated  in  it,  as  well 
as  the  nature  and  amount  of  the  business  transacted  by  the  firm,  and 
that  no  account  has  been  had  between  the  complainant  and  the 
defendant  Kennedy,  who  refuses  to  account.  Here,  then,  is  such_a 
case  as  requires  the  interposition  of  a  court  of  chancery,  to  settle 
and  adjust  the  rights  and  claims  of  the  several  partners.  It  is  true 
that  the  bill  states  that  the  complainant  and  Brady  have  settled  as 
between  themselves,  and  that  the  complainant  has  succeeded  to  all 
of  the  rights  and  interests  of  Brady  in  the  partnership  business; 
but  this  does  not  make  it  the  less  necessary  that  an  account  should  be 
had  between  the  complainant  and  Kennedy,  to  settle  their  respective 
rights;  and  to  accomplish  this,  it  was  necessary  to  make  Brady  a 
party  to  the  bill.  The  bill  also  states  that  the  partnership  advanced 
to  Kennedy,  one  of  its  members,  in  work,  and  labor,  etc.,  to  the 
amount  of  some  $8,000,  which  is  nearly  the  extent  of  the  whole 
partnership  profits,  thus  showing  substantially  that  Kennedy  had 
received  nearly  all  of  the  profits  of  the  work  on  section  120.  In  what 
way  could  this  be  recovered  back  by  the  other  members  of  the  firm,  or  in 
what  way  could  he  be  compelled  to  account  for  these  advances, 
unless  by  the  mode  here  adopted?  One  member  of  a  partnership 
cannot  sue  the  firm  at  law  for  advances  made  by  him  to  the  joint 
concern;  nor  can  the  firm  sue  an  individual  partner  for  anything  that 
he  may  have  drawn  out  of  the  joint  stock  or  proceeds,  no  matter  how 
much  more  than  his  share  it  might  have  been;  and  the  reason  is,  that 
one  man  cannot  occupy  the  double  position  of  plaintiff  and  defendant 
at  the  same  time.  -  The  aid  of  this  court  is  just  as  necessary  to  settle 
the  account  of  these  advances,  as  it  is  to  settle  the  accounts  arising  out 
of  the  immediate  transactions  of  the  special  business  of  the  partner- 
ship. 

The  bill  then  being  sufficient  in  substance,  although  not  so  partic- 
ular as  might  be  desirable,  the  demurrer  should  have  been  overruled. 
This  disposes  also  of  the  second  error. 

Decree  reversed. 

QUESTIONS 

1.  A  and  B  are  partners  trading  under  the  firm  name  of  the  A  Company. 
The  firm  has  a  cause  of   action  against  X.     How  will  the  action  be 
brought?    How  would  the  action  be  brought  if  the  company  were  a 
corporation  ? 

2.  The  firm  advanced  $500  to  B.    The  company  brings  an  action  at  law 
against  B  for  the  money.    What  decision  ?    Would  your  answer  be  the 
same  if  the  company  were  a  corporation  ? 


308  LAW  AND  BUSINESS 

3.  A  advances  $500  to  the  firm.    He  brings  an  action  at  law  to  recover 
the  amount.    What  decision?    What  decision  in  case  the  company 
were  a  corporation  ? 

4.  A  and  B  dissolve  their  firm  and  A,  with  the  consent  of  B,  sells  the  firm 
property,  pays  all  firm  debts,  and  has  left  a  balance  of  $7,500.    A  and  B 
agree  that  A  is  entitled  to  $5,000  and  that  B  is  entitled  to  $2,500  of  this 
amount.     B  brings  an  action  at  law  to  recover  the  $2,500.    What 
decision  ? 

5.  A  and  B  enter  into  a  contract  to  form  a  partnership  to  engage  in  the 
real  estate  business.    A  is  suing  B  at  law  for  breach  of  his  contract. 
What  decision  ? 

6.  A  and  B  entered  into  a  contract  to  form  a  partnership  and  continue  it 
for  one  year.    Before  the  end  of  the  year  B  withdrew  from  the  business 
without  A's  consent.    A  is  suing  B  at  law  for  damages.    What  decision  ? 

MASON  v.  ELDRED 

6  Wallace's  United  States  Reports  231  (1867) 
Mason  sued,  in  the  circuit  court  for  Wisconsin,  Anson  Eldred, 
Elisha  Eldred,  and  one  Balcom,  trading  as  partners,  upon  a  partner- 
ship note  of  theirs.  Process  was  served  on  Anson  Eldred  alone, 
who  alone  appeared,  and  pleaded  non  assumpsit.  On  the  trial,  the 
note  being  put  in  evidence  by  the  plaintiff,  Eldred  offered  the  record 
of  a  judgment  in  one  of  the  state  courts  of  Michigan,  showing  that 
Mason  had  already  brought  suit  in  that  court  on  the  same  note 
against  the  partnership;  where,  though  Elisha  Eldred  was  alone 
served  and  alone  appeared,  judgment  in  form  had  passed  against 
all  the  defendants  for  the  full  amount  due  upon  trie  note. 

The  evidence  being  objected  to  by  the  plaintiff,  because  not 
admissible  under  the  pleadings,  and  because  it  appeared  on  the  face 
of  the  record  that  there  was  no  judgment  against  either  of  the  defend- 
ants named  except  Elisha  Eldred,  who  alone,  as  appeared  also, 
was  served  or  appeared,  and  because  it  was  insufficient  to  bar  the 
plaintiff's  action,  the  question  whether  it  was  evidence  under  the 
issue  in  bar  of,  and  to  defeat  a  recovery  against,  Anson  Eldred,  was 
certified  to  this  court  for  decision  as  one  on  which  the  judges  of  the 
circuit  court  were  opposed. 

FIELD,  J.  If  the  note  in  suit  was  merged  in  the  judgment,  then 
the  judgment  is  a  bar  to  the  action,  and  an  exemplification  of  its 
record  is  admissible,  for  it  has  long  been  settled  that  under  the  plea 
of  the  general  issue  in  assumpsit  evidence  may  be  received  to  show, 
not  merely  that  the  alleged  cause  of  action  never  existed,  but  also 


NATURE  AND  CHARACTERISTICS  OF  FORMS  309 

to  show  that  it  did  not  subsist  at  the  commencement  of  the  suit. 
Young  v.  Black,  7  Cranch,  565;  Young  v.  Rummel,  2  Hill,  480.  On  the 
other  hand,  if  the  note  is  not  thus  merged,  it  still  forms  a  subsisting 
cause  of  action,  and  the  judgment  is  immaterial  and  irrelevant. 

The  question  then  for  determination  relates  to  the  operation  of 
the  judgment  upon  the  note  in  suit. 

The  plaintiff  contends  that  a  copartnership  note  is  the  several 
obligation  of  each  copartner,  as  well  as  the  joint  obligation  of  all, 
and  that  a  judgment  recovered  upon  the  note  against  one  copartner 
is  not  a  bar  to  a  suit  upon  the  same  note  against  another  copartner; 
and  the  latter  position  is  insisted  upon  as  the  rule  of  the  common 
law,  independent  of  the  joint  debtor  act  of  Michigan. 

It  is  true  that  each  partner  is  bound  for  the  entire  amount  due  on 
copartnership  contracts,  and  that  this  obligation  is  so  far  several 
that  if  he  is  sued  alone,  and  does  not  plead  the  non-joinder  of  his 
copartners,  a  recovery  may  be  had  against  him  for  the  whole  amount 
due  upon  the  contract,  and  a  joint  judgment  against  the  copartners 
may  be  enforced  against  the  property  of  each.  But  this  is  a  different 
thing  from  the  liability  which  arises  from  a  joint  and  several  contract. 
There  the  contract  contains  distinct  engagements,  that  of  each  con- 
tractor individually,  arid  that  of  all  jointly,  and  different  remedies 
may  be  pursued  upon  each.  The  contractors  may  be  used  separately 
on  their  several  engagements  or  together  on  their  joint  undertaking. 
But  in  copartnerships  there  is  no  such  several  liability  of  the  co- 
partners. Copartnerships  are  formed  for  joint  purposes.  The  mem- 
bers undertake  joint  enterprises,  they  assume  joint  risks,  and  they 
incur  in  all  cases  joint  liabilities.  In  all  copartnership  transactions 
this  common  risk  and  liability  exist.  Therefore  it  is  that  in  suits 
upon  these  transactions  all  the  copartners  must  be  brought  in  except 
when  there  is  some  ground  of  personal  release  from  liability,  as 
infancy  or  a  discharge  in  bankruptcy,  and  if  not  brought  in,  the 
omission  may  be  pleaded  in  abatement.  The  plea  in  abatement 
avers  that  the  alleged  promises,  upon  which  the  action  is  brought, 
were  made  jointly  with  another  and  not  with  the  defendant  alone, 
a  plea  which  would  be  without  meaning,  if  the  copartnership  contract 
was  the  several  contract  of  each  copartner. 

The  language  of  LORD  MANSFIELD  in  giving  the  judgment  of.  the 
king's  bench  in  Rice  v.  Shute,  5  Burr.  2611,  "that  all  contracts  with 
partners  are  joint  and  several,  and  every  partner  is  liable  to  pay 
the  whole,"  must  be  read  in  connection  with  the  facts  of  the  case, 


310  LAW  AND  BUSINESS 

and  when  thus  read  does  not  warrant  the  conclusion  that  the  court 
intended  to  hold  a  copartnership  contract  the  several  contract  of 
each  copartner,  as  well  as  the  joint  contract  of  all  the  copartners, 
in  the  sense  in  which  these  terms  are  understood  by  the  plaintiff's 
counsel,  but  only  that  the  obligation  of  each  copartner  was  so  far 
several  that  in  a  suit  against  him  judgment  would  pass  for  the  whole  de- 
mand, if  the  nonjoinder  of  his  copartners  was  not  pleaded  in  abatement. 

The  plea  itself,  which,  as  the  court  decided,  must  be  interposed 
in  such  cases,  is  inconsistent  with  the  hypothesis  of  a  several  liability. 

For  the  support  of  the  second  position,  that  a  judgment  against 
one  copartner  on  a  copartnership  note  does  not  constitute  a  bar  to  a 
suit  upon  the  same  note  against  another  copartner,  the  plaintiff  relies 
upon  the  case  of  Sheehy  v.  Mandeville,  decided  by  this  court,  and 
reported  in  6  Cranch,  254.  In  that  case  the  plaintiff  brought  a  suit 
upon  a  promissory  note  given  by  Jamesson  for  a  copartnership  debt 
of  himself  and  Mandeville.  A  previous  suit  had  been  brought  upon 
the  same  note  against  Jamesson  alone,  and  judgment  recovered. 
To  the  second  suit  against  the  two  copartners  the  judgment  in  the 
first  action  was  pleaded  by  the  defendant,  Mandeville,  and  the  court 
held  that  it  constituted  no  bar  to  the  second  action,  and  sustained  a 
demurrer  to  the  plea. 

The  decision  in  this  case  has  never  received  the  entire  approbation 
of  the  profession,  and  its  correctness  has  been  doubted  and  its  authority 
disregarded  in  numerous  instances  by  the  highest  tribunals  of  different 
states.  It  was  elaborately  reviewed  by  the  supreme  court  of  New 
York  in  the  case  of  Robertson  v.  Smith,  18  Johnson,  459,  where  its 
reasoning  was  declared  unsatisfactory,  and  a  judgment  rendered  in 
direct  conflict  with  its  adjudication. 

In  the  supreme  court  of  Massachusetts  a  ruling  similar  to  that  of 
Robertson  v.  Smith  was  made.  Ward  v.  Johnson,  13  Mass.  148. 
In  Wann  v.  McNulty,  2  Oilman,  359,  the  supreme  court  of  Illinois 
commented  upon  the  case  of  Sheehy  v.  Mandeville,  and  declined  to 
follow  it  as  authority.  The  court  observed  that  notwithstanding 
the  respect  which  it  felt  for  the  opinions  of  the  Supreme  Court  of 
the  United  States,  it  was  well  satisfied  that  the  rule  adopted  by  the 
several  state  courts — referring  to  those  of  New  York,  Massachusetts, 
Maryland,  and  Indiana — was  more  consistent  with  the  principles  of 
law,  and  was  supported  by  better  reasons. 

In  Smith  v.  Black,  9  Sergt.  &  Rawle,  142,  the  supreme  court  of 
Pennsylvania  held  that  a  judgment  recovered  against  one  of  two 


NATURE  AND  CHARACTERISTICS  OF  FORMS  311 

partners  was  a  bar  to  a  subsequent  suit  against  both,  though  the  new 
defendant  was  a  dormant  partner  at  the  time  of  the  contract,  and  was 
not  discovered  until  after  the  judgment.  "No  principle,"  said  the 
court,  "is  better  settled  than  that  a  judgment  once  rendered  absorbs 
and  merges  the  whole  cause  of  action,  and  that  neither  the  matter  nor 
the  parties  can  be  severed,  unless  indeed  where  the  cause  of  action 
is  joint  and  several,  which,  certainly,  actions  against  partners  are 
not." 

In  its  opinion  the  court  referred  to  Sheehy  v.  Mandeville,  and 
remarked  that  the  decision  in  that  case,  however  much  entitled  to 
respect  from  the  character  of  the  judges  who  composed  the  Supreme 
Court  of  the  United  States,  was  not  of  binding  authority,  and  it  was 
disregarded. 

In  King  v.  Hoar,  13  Meeson  &  Welsby,  495,  the  question  whether 
a  judgment  recovered  against  one  of  two  joint  contractors  was  a  bar 
to  an  action  against  the  other,  was  presented  to  the  court  of  exchequer 
and  was  elaborately  considered.  The  principal  authorities  were 
reviewed,  and  the  conclusion  reached  that  by  the  judgment  recovered 
the  original  demand  had  passed  in  rem  iudicatam,  and  could  not  be 
made  the  subject  of  another  action.  In  the  course  of  the  argument 
the  case  of  Sheehy  v.  Mandeville  was  referred  to  as  opposed  to  the 
conclusion  reached,  and  the  court  observed  that  it  had  the  greatest 
respect  for  any  decision  of  CHIEF  JUSTICE  MARSHALL,  but  that  the 
reasoning  attributed  to  him  in  the  report  of  that  case  was  not  satis- 
factory. Mr.  JUSTICE  STORY,  in  Traflon  v.  The  United  States,  3 
Story,  651,  refers  to  this  case  in  the  exchequer,  and  to  that  of  Sheehy 
v.  Mandeville,  and  observes  that  in  the  first  case  the  court  of  exchequer 
pronounced  what  seemed  to  him  a  very  sound  and  satisfactory  judg- 
ment, and  as  to  the  decision  in  the  latter  case,  that  he  had  for  years 
entertained  great  doubts  of  its  propriety. 

The  general  doctrine  maintained  in  England  and  the  United 
States  may  be  briefly  stated.  A  judgment  against  one  upon  a  joint 
contract  of  Several  persons,  bars  an  action  against  the  others,  though 
the  latter  were  dormant  partners  of  the  defendant  in  the  original 
action,  and  this  fact  was  unknown  to  the  plaintiff  when  that  action 
was  commenced.  When  the  contract  is  joint,  and  not  joint  and 
several,  the  entire  cause  of  action  is  merged  in  the  judgment.  The 
joint  liability  of  the  parties  not  sued  with  those  against  whom  the 
judgment  is  recovered,  being  extinguished,  their  entire  liability  is 
gone.  They  cannot  be  sued  separately,  for  they  have  incurred  no 


312  LAW  AND  BUSINESS 

several  obligation,  they  cannot  be  sued  jointly  with  the  others,  because 
judgment  has  already  been  recovered  against  the  latter,  who  would 
otherwise  be  subjected  to  two  suits  for  the  same  cause. 

If,  therefore,  the  common  law  rule  were  to  govern  the  decision 
of  this  case,  we  should  feel  obliged  notwithstanding  Sheehy  v.  Maude- 
mile,  to  hold  that  the  promissory  note  was  merged  in  the  judgment  of 
the  court  of  Michigan,  and  that  the  judgment  would  be  a  bar  to  the 
present  action.  But  by  a  statute  of  that  state,  Compiled  Laws  of 
1857,  Vol.  2,  chap.  133,  page  1219,  the  rule  of  the  common  law 
is  changed  with  respect  to  judgments  upon  demands  of  joint  debtors, 
when  some  only  of  the  parties  are  served  with  process.  The  statute 
enacts  that  "in  actions  against  two  or  more  persons  jointly  indebted 
upon  any  joint  obligation,  contract,  or  liability  if  the  process  against 
all  of  the  defendants  shall  have  been  duly  served  upon  either  of  them, 
the  defendant  so  served  shall  answer  to  the  plaintiff,  and  in  such  case 
the  judgment,  if  rendered  in  favor  of  the  plaintiff,  shall  be  against 
all  the  defendants  in  the  same  manner  as  if  all  had  been  served  with 
process,"  and  that,  "such  judgment  shall  be  conclusive  evidence  of 
the  liabilities  of  the  defendant  who  was  served  with  process  in  the  suit, 
or  who  appeared  therein;  but  against  every  other  defendant  it  shall 
be  evidence  only  of  the  extent  of  the  plaintiff's  demand,  after  the  lia- 
bility of  such  defendant  shall  have  been  established  by  other  evidence." 

Judgments  in  cases  of  this  kind  against  the  parties  not  served 
with  process,  or  who  do  not  appear  therein,  have  no  binding  force 
upon  them  personally.  The  principle  is  as  old  as  the  law,  and  is  of 
universal  justice,  that  no  one  shall  be  personally  bound  until  he  has 
had  his  day  in  court,  which  means  until  citation  is  issued  to  him,  and 
opportunity  to  be  heard  is  afforded.  UArcy  v.  Ketchum,  i  Howard, 
165.  Nor  is  the  demand  against  the  parties  not  sued  merged  in  the 
judgment  against  the  party  brought  into  court.  The  statute  declares 
what  the  effect  of  the  judgment  against  him  shall  be  with  respect  to 
them;  it  shall  only  be  evidence  of  the  extent  of  the  plaintiff's  demand 
after  their  liability  is  by  other  evidence  established.  It  is  entirely 
within  the  power  of  the  state  to  limit  the  operation  of  the  judgment 
thus  recovered.  The  state  can  as  well  modify  the  consequences  of  a 
judgment  in  respect  to  its  effect  as  a  merger  and  extinguishment  of 
the  original  demand,  as  it  can  modify  the  operation  of  the  judgment 
in  any  other  particular. 

A  similar  statute  exists  in  the  state  of  New  York,  and  the  highest 
tribunals  of  New  York  and  Michigan,  in  construing  these  statutes, 


NATURE  AND  CHARACTERISTICS  OF  FORMS  313 

have  held,  notwithstanding  the  special  proceedings  which  they 
authorize  against  the  parties  not  served  to  bring  them  afterward 
before  the  court,  if  found  within  the  state,  that  such  parties  may  be 
sued  upon  the  original  demand. 

In  Bonesteel  v.  Todd,  9  Mich.  379,  an  action  of  covenant  was 
brought  against  two  parties  to  recover  rent  reserved  upon  a  lease. 
One  of  them  was  alone  served  with  process,  and  he  appeared  and 
pleaded  the  general  issue,  and  on  the  trial,  as  in  the  case  at  bar, 
produced  the  record  of  a  judgment  recovered  against  himself  and  his 
co-defendant  under  the  joint  debtor  act  of  New  York,  process  in  that 
state  having  been  served  upon  co-defendant  alone.  The  court  below 
held  the  judgment  to  be  a  bar  to  the  action.  On  error  to  the  supreme 
court  of  the  state  this  ruling  was  held  to  be  erroneous.  After  referring 
to  decisions  in  New  York,  the  court  said, 

No  one  has  ever  doubted  the  continuing  liability  of  all  parties.  We 
cannot,  therefore,  regard  the  liability  as  extinguished.  And,  inasmuch  as 
the  new  action  must  be  based  upon  the  original  claim,  while,  as  in  the  case 
of  foreign  judgments  at  common  law,  it  may  be  of  no  great  importance 
whether  the  action  may  be  brought  in  form  upon  the  judgment  or  on  the 
previous  debt,  it  is  certainly  more  in  harmony  with  our  practice  to  resort 
to  the  form  of  action  appropriate  to  the  real  demand  in  controversy.  While 
we  do  not  decide  an  action  in  form  on  the  judgment  to  be  inadmissible, 
we  think  the  action  on  the  contract  the  better  remedy  to  be  pursued. 

In  Oakley  v.  Aspinwall,  4  N.Y.  513,  the  court  of  appeals  of  New 
York  had  occasion  to  consider  the  effect  of  a  judgment  recovered  under 
the  joint  debtor  act  of  that  state  upon  the  original  demand.  Mr. 
JUSTICE  BRONSON,  speaking  for  the  court,  says: 

It  is  said  that  the  original  demand  was  merged  in,  and  extinguished  by 
the  judgment,  and  consequently,  that  the  plaintiff  must  sue  upon  the 
judgment,  if  he  sues  at  all.  That  would  undoubtedly  be  so  if  both  the 
defendants  had  been  before  the  court  in  the  original  action.  But  the  joint 
debtor  act  creates  an  anomaly  in  the  law.  And  for  the  purpose  of  giving 
effect  to  the  statute,  and  at  the  same  time  preserving  the  rights  of  all 
parties,  the  plaintiff  must  be  allowed  to  sue  on  the  original  demand.  There 
is  no  difficulty  in  pursuing  such  a  course;  it  can  work  no  injury  to  anyone, 
and  it  will  avoid  the  absurdity  of  allowing  a  party  to  sue  on  a  pretended 
cause  of  action  which  is,  in  truth,  no  cause  of  action  at  all,  and  then  to 
recover  on  proof  of  a  different  demand. 

Following  these  authorities,  and  giving  the  judgment  recovered 
in  Michigan,  the  same  effect  and  operation  that  it  would  have  in 


314  LAW  AND  BUSINESS 

that  state,  we  answer  the  question  presented  in  the  certificate,  that 
the  exemplification  of  the  record  of  the  judgment  recovered  against 
the  defendant,  Elisha  Eldred,  offered  by  the  defendant,  Anson  Eldred, 
is  not  admissible  in  evidence  in  bar  of,  and  to  defeat  a  recovery 
against  the  latter. 

QUESTIONS 

1.  What  is  the  purpose  of  legislation  like  that  under  consideration  in  the 
principal  case?    Examine  the  laws  of  some  state  in  which  you  are 
interested  and  see  whether  it  has  passed  similar  legislation. 

2.  What  is  meant  by  joint  liability?  several  liability?  joint  and  several 
liability  ?     Which  properly  describes  the  liability  of  partners  on  partner- 
ship contracts  ?    Which  properly  describes  their  liability  for  firm  torts  ? 

3.  A,  B,  and  C  are  partners.     P  sues  A  and  B  on  a  firm  debt.    A  and  B 
do  not  object  to  the  non-joinder  of  C.    Later  P  brings  an  action  against 
C  on  the  same  debt.    What  decision  ? 

4.  A  and  B  seasonably  object  to  the  non-joinder  of  C.    What  decision  ? 

5.  (a)  P  shows  that  he  cannot  serve  process  on  C  because  he  is  out  of  the 
jurisdiction  of  the  court,     (b)  P  shows  that  C  is  dead.    What  decision 
in  an  action  on  a  firm  debt  under  each  hypothesis  ? 

6.  How  does  the  liability  of  a  stockholder  in  a  corporation  differ  from 
the  liability  of  a  partner  ? 

7.  How  can  a  judgment  creditor  of  a  partnership  proceed  in  getting  satis- 
faction of  his  judgment  ?    How  does  a  judgment  creditor  of  a  corporation 
proceed  in  getting  satisfaction  of  his  judgment  ? 

WILLMOTT  v.  LONDON  ROAD  CAR  COMPANY 

Law  Reports  2  Chancery  Division  525  (1910) 

By  a  lease  dated  May  31,  1900,  the  plaintiff  granted  certain  land 
and  buildings  to  one  Porter  for  a  term  of  sixty-two  and  a  half  years, 
and  Porter  covenanted  that  he  would  not  without  the  previous  written 
consent  of  the  plaintiff  assign  or  underlet  the  possession  of  the  premises 
or  any  part  thereof.  But  such  consent  was  not  to  be  withheld  in 
" respect  of  a  respectable  or  responsible  person."  In  February,  1901, 
the  lease  was  with  the  plaintiff's  consent  assigned  to  the  defendants, 
who  entered  into  and  took  possession  of  the  premises  under  the  lease. 

In  1908  the  defendants  sold  their  undertaking  and  property  to 
the  London  General  Omnibus  Co.,  Limited,  and  in  December,  1908, 
the  defendants  applied  to  the  plaintiff  for  leave  to  assign  the  lease  to 
that  company.  On  April  9,  1909,  the  plaintiff  refused  to  give  his 
consent  to  the  assignment.  In  the  following  July  the  defendants 


NATURE  AND  CHARACTERISTICS  OF  FORMS  315 

without  the  plaintiff's  consent  let  the  London  General  Omnibus  Co., 
Limited,  into  possession  of  the  premises  comprised  in  the  lease. 
Thereupon  the  plaintiff  commenced  this  action  and  claimed  a  declara- 
tion that  he  was  entitled  to  re-enter  and  to  recover  possession  of  ihe. 
demised  premises  as  on  a  forfeiture  of  the  said  lease  by  reason  of 
the  defendants  having  without  his  written  consent  parted  with  the 
possession  of  the  premises  to  the  Omnibus  Company,  on  the  ground 
that  that  company  was  not  a  " person"  within  the  meaning  of  the 
aforesaid  covenant  in  the  lease. 

.  The  defendants  alleged  in  their  defense  that  the  London  General 
Omnibus  Co.,  Limited,  was  a  " respectable  and  responsible  person" 
within  the  meaning  of  those  words  in  the  lease,  and  counterclaimed 
for  a  declaration  that  they  were  entitled  to  assign  the  said  premises 
to  the  Omnibus  Company  without  further  application  to  or  receiving 
the  consent  of  the  plaintiff. 

NEVILLE,  J.,  held  that  a  corporation  was  not  capable  of  being  a 
"respectable  and  responsible  person"  within  the  meaning  of  the 
covenant,  and  that  the  plaintiff  was  entitled  to  recover  possession. 

The  defendants  appealed. 

FLETCHER  MOULTON,  L.  J.  The  question  before  us  turns  upon 
the  construction  of  a  provision  in  a  lease,  and  of  course  in  construing 
it  we  must  take  into  consideration  all  the  words  that  we  find  here. 
But,  as  the  argument  of  the  counsel  has  before  indicated,  the  question 
naturally  falls  into  two  parts.  We  have  first  to  consider  whether 
the  word  "person"  used  in  a  provision  of  this  type  in  a  lease  can 
include  corporations  or  whether  it  is  restricted  to  individuals.  Then 
if  we  come  to  the  conclusion  that  it  can  include  corporations  we  have 
to  consider  whether  the  indications  afforded  by  the  two  epithets 
which  are  applied  to  the  word  "person"  in  the  lease  in  question  are 
such  as  lead  us  to  the  conclusion  that  it  bears  a  narrower  sense  here. 

In  my  opinion  there  can  be  no  question  that  the  word  "person" 
may  include  a  corporation.  The  quotation  from  Blackstone's  Com- 
mentaries is  decisive  on  the  point,  and  I  have  never  known  any  doubt 
thrown  upon  it.  But,  as  LORD  BLACKBURN  points  out  in  Pharmaceut- 
ical Society  v.  London  and  Provincial  Supply  Association  (5  A.  C.  857), 
the  fact  that  the  word  has  an  extended  meaning  in  law  does  not  bring 
with  it  as  a  matter  of  necessity  that  wherever  that  word  is  used  we 
must  attribute  to  it  that  extended  meaning.  He  there  points  out 
that  in  ordinary  parlance  "person"  would  probably  be  used — certainly 
in  many  contexts — in  a  much  narrower  signification.  He  further 


316  LAW  AND  BUSINESS 

points  out  that  in  legal  documents  the  probability  would  be  that  it 
was  used  in  its  more  complete  legal  sense.  In  so  saying  the  learned 
LORD  does  not  in  my  opinion  intend  to  draw  any  hard  and  fast  line 
between  two  classes  of  documents  and  to  lay  down  the  principle  that 
we  must  attribute  a  particular  meaning  to  the  word  when  used  in  one 
class  of  documents  and  must  not  attribute  that  meaning  to  it  when 
used  in  the  other.  He  intends,  I  think,  to  indicate  that  as  we  proceed 
from  common  parlance  toward  the  most  technical  legal  documents 
there  will  be  a  gradually  increasing  probability  that  the  full  legal 
sense  is  to  be  attached  to  the  word.  Now  in  the  present  case  we  are 
dealing  with  a  lease,  a  document  of  a  legal  character,  drawn  up  no 
doubt  by  persons  in  the  legal  profession,  and  I  ask  myself  whether 
in  this  document  the  word  "person"  is  to  bear  its  full  extended  legal 
meaning  or  whether  we  are  to  attribute  to  it  the  narrower  meaning 
which  it  bears  so  frequently  in  ordinary  conversation.  On  this  point 
we  have  a  very  valuable  guide  in  the  decision  of  CHITTY,  J.,  in 
In  re  Jeffcock's  Trusts,  51  L.  J.  (Ch.)  509.  In  that  case  some  trustees 
under  a  will  had  power  to  let  trust  property  to  such  person  or 
persons  as  they  might  think  fit,  and  they  came  to  the  court  to 
know  whether  that  authorized  them  to  let  the  property  to  a  limited 
company.  This  raised  in  the  clearest  way  the  question  whether 
in  a  document  of  that  type  the  proper  interpretation  (apart  from 
indications  to  the  contrary)  of  the  word  " person"  was  its  extended 
sense  or  not,  and  CHITTY,  J.,  decided  that  it  must  be  deemed 
to  be  used  in  the  extended  sense.  I  cannot  help  thinking  that  it 
would  have  been  a  disastrous  thing  if  it  had  been  decided  otherwise . 
I  see  no  reason  why  trustees  in  such  a  case  should  be  prevented 
from  accepting  eligible  tenants  merely  because  they  are  corpo- 
rate bodies  when  they  may  be  as  capable  of  performing  the  cove- 
nants and  paying  the  rent  as  any  individual  tenant  the  trustees 
might  get.  I  may  say  also  that  I  think  that  a  gradual  change  in  the 
organization  of  the  business  world  has  been  going  on  for  the  last 
century,  whereby  more  and  more  of  the  business  of  the  country  is 
transacted  by  corporations,  and  less  and  less  by  private  individuals, 
and  this  would  naturally  bring  and  in  fact  has  brought  with  it  an 
increased  tendency  to  use  the  word  "person"  as  including  all  legal 
persons  who  can  perform  the  duties  of  persons  with  regard  to  property. 
The  possibility  that  a  tenant  would  be  a  corporate  body  was  very  much 
smaller  one  hundred  years  ago  than  it  is  at  the  present  time.  Hence 
in  any  legal  document  dealing  with  the  holding  of  property  and  the 


NATURE  AND  CHARACTERISTICS  OF  FORMS  317 

performance  of  the  obligations  connected  with  it  I  should  myself  be 
inclined  to  hold  that  " person"  was  used  in  its  extended  sense  unless 
there  was  something  in  the  context  or  in  the  object  of  the  provision 
which  drove  me  to  a  different  conclusion.  In  the  present  case  there 
is  nothing  of  the  kind.  A  power  to  object  on  reasonable  grounds  to 
a  person  as  an  assignee  of  a  lease  is  in  my  opinion  only  a  provision  for 
the  protection  of  the  lessor  with  regard  to  the  proper  user  of  the 
property  and  the  performance  of  the  covenants  as  to  rent  or  otherwise, 
and  I  can  see  no  reason  why  -that  should  exclude  any  important 
branch  of  the  wide  class  to  which  the 'word  "person"  is  properly 
applied  provided  that  members  of  that  branch  are  capable  of  perform- 
ing the  obligations  under  the  lease. 

For  these  reasons  I  am  of  opinion  that  the  first  part  of  the  argu- 
ment of  the  plaintiff's  counsel  breaks  down,  and  that  if  there  were 
no  adjectives  qualifying  the  word  the  provision  in  the  lease  that  the 
consent  should  not  be  withheld  in  respect  of  a  person  against  whom 
there  was  no  objection  would  certainly  include  corporations. 

Now  do  the  two  epithets  which  qualify  the  word  " person" 
indicate  that  the  narrower  sense  is  to  be  given  to  the  word;  in  other 
words,  are  they  so  personal,  so  individual,  that  they  preclude  our 
including  those  artificial  persons  recognized  by  the  law  whom  we  call 
corporations?  The  word  "responsible"  is  just  as  applicable  to  a 
company  or  any  other  incorporated  body  as  it  is  to  a  person,  and  that 
has  not  been  contested  at  the  bar.  The  whole  argument  on  this  part 
of  the  case  has  been  based  on  the  word  "respectable."  In  my  opinion 
the  word  "respectable"  points  to  the  behavior  of  the  person,  primarily 
in  carrying  on  his  business,  but  probably  also  in  the  whole  of  his 
external  relations,  and  I  cannot  see  why  it  is  not  just  as  applicable 
in  that  sense  to  a  corporation  as  it  is  to  a  natural  person.  It  is 
perpetually  used  with  regard  to  corporations.  The  instance  that  was 
given  by  FAR  WELL,  L.  J.,  in  the  course  of  the  argument  is  probably 
as  good  as  any.  You  might  well  say  "No  respectable  insurance 
company  adopts  such  and  such  a  policy."  Everybody  would  under- 
stand that  to  mean  an  insurance  company  which  carried  on  its  business 
in  accordance  with  high  principles  and  which  had  acquired  a  corres- 
ponding reputation.  The  object  of  this  provision  was  that  the  prop- 
erty should  only  go  into  hands  that  would  treat  it  so  that  the  locality, 
if  I  might  say  so,  would  not  lose  reputation,  and  in  which  the  per- 
formance of  the  covenants  of  the  lease  would  be  secure.  I  cannot 
see  why  the  words  "respectable"  and  "responsible"  should  not  have 


318  LAW  AND  BUSINESS 

been  inserted  in  order  to  exclude  corporations  that  did  not  carry  on 
business  in  a  reputable  manner  or  were  not  equal  to  the  burdens  of 
the  covenants  and  therefore  not  responsible,  and  not  with  any  inten- 
tion to  exclude  corporations  generally.  For  these  reasons  I  come  to 
the  conclusion  that  the  London  General  Omnibus  Co.  was  a  proper 
tenant  as  to  whom  consent  to  assign  could  not  be  refused,  and  I  agree 
with  the  conclusion  of  the  Master  of  the  Rolls  that  the  action  must  be 
dismissed  and  the  appeal  allowed. 

QUESTIONS 

1.  What  would  have  been  the  decision  of  the  court  in  this  case  if  the  omnibus 
company  had  been  a  partnership  ? 

2.  X  sells  Blackacre  to  Y  and  stipulates  in  the  conveyance  that  title  to  the 
land  shall  never  vest  in  a  "colored  person."    X  sues  the  D  Cemetery 
Company  for  possession  of  the  land,  alleging  and  proving  that  the  D 
Company  is  a  corporation   and  that  all  of  its  stockholders,  directors, 
and  officers  are  "colored  persons."    What  decision  ?    What  would  have 
been  the  decision  in  case  the  D  Company  had  been  a  partnership  ? 

3.  A  statute  forbids  "any  person  to  sell  cigarettes  to  minors."    Is  the 
D  Company,  a  corporation,  punishable  under  this  statute  ? 

4.  Is  a  corporation  a  "person"  within  the  meaning  of  the  Fourteenth 
Amendment  to  the  federal  constitution  which  forbids  a  state  to  pass 
any  law  which  will  deprive  any  person  of  life,  liberty,  or  property  without 
due  process  of  law  ? 

5.  The  Constitution  provides  that  under  certain  circumstances  the  federal 
courts  shall  have  jurisdiction  over  controversies  which  arise  between 
citizens  of  different  states.    Is  a  corporation  a  citizen  within  the  meaning 
of  this  provision  ? 

6.  The  Constitution  provides  that  the  citizens  of  each  state  shall  be  entitled 
to  all  the  privileges  and  immunities  of  the  citizens  of  the  several  states. 
Is  a  corporation  a  citizen  within  the  meaning  of  this  provision  ? 

HALL'S  SAFE  COMPANY  v.  HERRING-HALL-MARVIN  SAFE 

COMPANY 

146  Federal  Reporter  37  (1906) 

SEVERENS,  CIR.  J.  The  gravamen  of  the  complaint  is  that  the 
defendants  invade  and  injure  the  good  will  and  reputation  of 
the  complainant's  business  by  the  adoption  of  the  corporate  name  of 
the  defendant,  the  "Hall's  Safe  Co.,"  and  also  by  inducing  the  pub- 
lic, through  advertisements,  circulars,  and  other  representations,  to 
believe  that  their  safes  are  the  product  of  the  complainant's  business. 


NATURE  AND  CHARACTERISTICS  OF  FORMS  319 

The  defendants  admit  the  acquisition  by  complainant  of  the  prop- 
erties, including  the  good  will,  of  the  Hall's  Safe  &  Lock  Co.,  but 
claim  that  the  individual  defendants  were  not  by  the  sale  of  the  latter 
company  deprived  of  the  right  to  organize  a  new  company  which  shall 
include  their  family  name,  and  that  the  name  of  "Hall's  Safe  Co.," 
is  one  which  may  lawfully  be  adopted. 

Upon  this  contention  it  becomes  important  to  determine  what 
were  and  are  the  relations  between  the  complainant  and  its  predecessor 
hi  title  and  the  several  defendants.  Undoubtedly  the  Herring-Hall- 
Marvin  Co.  acquired  by  its  contract  of  purchase  with  the  Hall's  Safe 
&  Lock  Co.  all  its  physical  properties  and  the  good  will  which  it  had 
acquired  in  its  business,  as  well  as  the  right  to  use  such  trade-names 
as  had  been  customarily  used  to.  identify  its  products.  It  acquired 
also  the  right  to  require  that  the  Hall's  Safe  &  Lock  Co.  should  go 
out  of  business,  or,  in  substance,  that  it  should  not  longer  engage  in 
business  of  the  kind  which  it  sold  to  the  Herring-Hall-Marvin  Co. 
But  it  is  contended  that  the  contract  reaches  beyond  the  corporation, 
the  Hall's  Safe  &  Lock  Co.,  and  binds  the  defendants  who  were  stock- 
holders and  officers  of  the  corporation,  and  prevents  them  and  any 
corporation  of  which  they  may  become  stockholders  and  managers 
from  doing  what  the  Hall's  Safe  &  Lock  Co.  could  not  do;  and  the 
principal  reason  for  this  contention  is  the  fact  that  these  individual 
defendants  participated  in  the  sale,  and  as  stockholders,  received 
its  benefits. 

We  are  of  opinion  that  this  proposition  cannot  be  sustained. 
The  contract  which  the  Herring-Hall-Marvin  Co.  had  was  with  the 
corporation  only,  and  not  with  its  stockholders  or  officers.  The 
officers  who  conducted  the  business  of  the  selling  company  were  not 
parties  to  the  contract.  It  is  a  familiar  rule  that  an  agent,  who, 
having  lawful  authority,  makes  a  contract  with  another  for  a  known 
principal,  does  not  bind  himself,  but  his  principal  only  (Story  on 
Agency,  sec.  261;  Mechem  on  Agency,  sec.  555;  Whitney  v.  Wyman, 
101  U.S.  392,  25  L.  Ed.  1050),  and  the  officers  of  a  private  corporation, 
in  respect  to  their  liability  on  contracts  entered  into  by  them  in  behalf 
of  the  corporation,  stand  upon  the  same  footing  as  agents  of  private 
individuals.  (21  Am.  &  Eng.  Ency.  of  Law  [2d  ed.]  879;  Whitney  v. 
Wyman,  supra.)  If  the  purchaser  desired  to  make  the  officers  and 
agents  of  the  selling  corporation  subject  to  the  stipulations  of  the 
company  in  the  contract  of  sale,  it  should  have  required  their  personal 
agreement  to  that  effect. 


320  LAW  AND  BUSINESS 

The  cases  cited  by  counsel  for  the  complainant  to  support  their 
contention,  that  the  court  may  look  through  the  form  of  a  corporate 
organization,  and  fasten  upon  the  stockholders  a  liability  for  the  acts 
of  the  corporation,  do  not  support  such  a  doctrine  as  applicable  to 
contract  relations.  These  are  State  v.  Standard  Oil  Co.,  49  Ohio  St. 
137,  30  N.E.  279,  15  L.R.A.  145,  34  Am.  St.  Rep.  541;  McKinley  v. 
Wheeler,  130  U.S.  630,  9  Sup.  Ct.  638,  32  L.  Ed.  1048;  and  Anthony 
v.  American  Glucose  Co.,  146  N.Y.  407,  41  N.E.  23.  They  were 
all  cases  where,  for  special  purposes  and  in  special  circumstances,  the 
court  held  that  it  was  competent  and  proper  to  regard  the  rights  and 
duties  of  stockholders  in  corporations.  None  of  them  impugns  the 
general  rule  above  stated  that  in  matters  of  contract  the  officers  and 
agents  of  a  corporation  are  not  bound  personally  by  stipulations 
made  by  them  in  behalf  of  their  principal.  This  rule  is  not  affected 
by  the  circumstances  that  they  are  indirectly  interested  as  stockholders 
in  the  contracts  of  their  corporation.  If  it  were  so,  it  would  break 
down  all  distinction  between  the  corporate  entity  and  its  component 
parts.1 

QUESTIONS 

1.  A,  B,  and  C  are  owners  of  all  the  stock  of  the  X  Company,  a  corporation. 
The  corporation,  through  its  officers,  sells  its  business  to  P  and  covenants 
that  it  will  not  re-engage  in  the  same  business  in  that  locality  for  a 
period  of  five  years.    The  covenant  is  signed  by  A  and  C  as  president 
and  secretary,  respectively,  of  the  X  Company.     Before  the  expiration 
of  the  five  years  A  buys  ten  shares  of  stock  in  the  Y  Company,  a  corpora- 
tion competing  with  P.    What  are  the  rights  of  P,  if  any,  against  A  ? 
against  the  Y  Company  ? 

2.  A,  B,  and  C,  partners  in  the  hardware  business,  sell  the  business  to  P 
and  covenant  not  to  re-engage  in  the  same  business  in  that  locality  for 
a  period  of  five  years.    Before  the  expiration  of  the  five  years,  A,  B,  C, 
D,  and  E  incorporate  the  Y  Company  and  enter  the  hardware  business 
in  competition  with  P.    What  are  the  rights,  if  any,  of  P  against  A,  B, 
and  C  ?  against  the  Y  Company  ? 

3.  In  the  foregoing  case,  A,  B,  and  C  associate  themselves  with  D  and  E 
and  re-enter  the  hardware  business  as  partners.    What  are  the  rights, 
if  any,  of  P  against  A,  B,  and  C  ?  against  the  firm  of  which  A,  B,  and  C 
are  members  ? 

'The  conclusion  reached  by  the  court  on  the  points  involved  herein  was 
affirmed  in  208  U.S.  554. 


NATURE  AND  CHARACTERISTICS  OF  FORMS  321 

UNITED  STATES  ».  MILWAUKEE  REFRIGERATOR 
TRANSIT  COMPANY 

142  Federal  Reporter  247  (1905) 

In  Equity.  On  motion  to  strike  out  and  on  general  demurrers 
to  the  bill  by  the  Chicago,  Rock  Island  &  Pacific  Railway  Co.  and 
others. 

SANBORN,  D.  J.    This  is  a  bill  in  equity  for  an  injunction  to 
prevent  the  payment  of  alleged  rebates  on  freight,  brought  under 
Elkins  Act,  February  19,  1903,  c.  708,  32  Stat.  847  (U.S.  Comp.  St. 
Supp.    1905,  p.   599).     The  defense  outlined  in  argument  of  the 
demurrers  is  that  it  appears  on  the  face  of  the  bill  that  the  alleged 
rebates  were  not  paid  back  to  the  shipper  (the  brewing  company), 
but  to  the  Refrigerator  Transit  Co.,  and,  in  substance  and  effect, 
nothing  more  is  shown  than  the  payment  to  a  soliciting  agent  (the 
Transit  Company)  of  a  commission  of  an  eighth  or  tenth  of  the 
published   tariff   rates,    thus   showing,   in   real   effect,  acts   neither 
unlawful,  immoral,  nor  injurious.    A  motion  is  also  made  on  behalf 
of  the  brewing  company  to  strike  out  certain  allegations  averring 
prior  and  disconnected  illegal  acts  on  its  part,  said  to  be  material  in 
proof,  to  characterize  the  acts  of  its  principal  officers  and  managers 
in  organizing  the  transit  company,  and  rebut  the  theory  that  the 
moneys  paid  by  the  carriers  to  the  transit  company  were  paid  as 
commissions  for  obtaining  the  business  and  not  as  prohibited  rebates. 
The  bill,  after  stating  that  the  Pabst  Brewing  Co.,  Milwaukee 
Refrigerator  Transit  Co.,  and  Wisconsin  Central  Railway  Co.  are 
Wisconsin  corporations,  and  the  other  defendants  foreign  corporations, 
that  the  attorney-general  has  directed  these  proceedings,  and  that  the 
shipments  originate  in  Milwaukee  and  continue  in  other  states  and 
countries,  contain  the  following  allegations,  here  given  in  brief  outline 
(the  figures  refer  to  the  numbered  paragraphs  of  the  bill):   (n)  The 
transit  company  was,  on  October  7,  1903,  organized,  inter  alia,  to 
operate  refrigerator  cars  on  defendants'  and  other  lines.     It  owns  and 
controls  540  such  cars.    It  was  conceived  and  is  operated  as  defend- 
ant carriers  well  knew  as  a  device  to  cover  the  receiving  of  rebates, 
concessions,  and  discriminations,  to-wit:    an  eighth  or  tenth  of  the 
published  rate;  whereby  the  traffic  is  carried  at  less  than  published 
rates.     Such  rebates  are  paid  and  accepted  under  the  pretense, 
claim,  and  guise  of  "  commissions, "  and  amount  to  large  sums  to 
complainants  unknown. 


322  LAW  AND  BUSINESS 

(12)  The  transit  company  was  incorporated  by  procurement  of 
the  attorneys  of  the  brewing  company,  and  at  its  instance  and  request, 
with  a  capital  of  $150,000,  having  five  directors,  and  with  power  to 
acquire  and  operate  refrigerator  cars,  and  contract  for  the  supply 
and  operation  of  refrigerator  transportation  by  land  and  water. 

(13)  The  brewing  company  is  a  Wisconsin  corporation  operating 
a  large  brewery  and  selling  and  shipping  beer  into  all  the  states  and 
territories  and  to  purchasers  in  foreign  countries.     It  has  a  capital  of 
$10,000,000  of  10,000  shares.     Gustav  Pabst  and   Fred  Pabst  are 
brothers,  owning  2,000  shares,  and  with   their  mother  and  sisters 
over  half  of  the  stock.     They  vote  and  control  a  majority  of  the  stock 
and  have  always  directed  and  controlled  the  election  of  directors,  and 
their  action;    they  have  been  and  are  its  president,  vice-president, 
and  general  managers,  and  have  always  controlled  all  its  sales,  pur- 
chases, and  shipments. 

(14)  Here  occurs  the  passage  above  quoted  as  to  rebates  prior  to 
the  Elkins  Act.    Upon  the  passage  of  that  act  the  brewing  company 
was  no  longer  able  to  directly  secure  rebates  and  cast  about  for  some 
device  to  evade  the  statute,  and  the  Pabsts,  as  such  officers,  and  one 
Howe,  as  traffic  manager,  intending  to  contrive  and  operate  a  device 
for  such  evasion,  caused  the  transit  company  to  be  formed.    Of  its 
1,500  shares,  1,340  were  issued  to  the  two  Pabsts,  35  shares  to  Fred 
Pabst's  wife  and  the  balance  to  dummy  directors,  to  give  color  to 
the  claim  that  its  stock  was  not  owned  by  the  brewing  company. 
After  investigation  by  the  interstate  commerce  commission  in  May, 
1905,  Gustav  Pabst  transferred  his  stock  in  the  transit  company  to 
Fred  Pabst.  and  had  some  person  elected  director  in  his  place;   but 
such  acts  were  colorable  merely,  he  still  retaining  a  large  pecuniary 
interest  in  the  corporation,  and  participating  in  its  control. 

(15)  Immediately  on  the  creation  of  the  transit  company  the 
Pabsts,  as  controlling  officers  of  the  brewing  company,  contracted 
with  themselves  as  executive  officers  of  the  transit  company,  for  a 
term  not  yet  expired,  to  give  the  latter  exclusive  control  of  the  ship- 
ment of  all  freight  of  the  brewing  company  moving  in  interstate  and 
foreign  commerce,  which  it  is  still  exercising.     The  contract  was 
made  to  enable  the  transit  company  to  route  the  shipment  of  such 
freight  on  the  lines  of  such  companies  as  will  pay  rebates,  and  withhold 
it  from  such  as  will  not,  and  all  rebates,  concessions,  and  discrimina- 
tions charged  in  the  bill  have  been  exacted  by  threats  of  such  diversion. 
Many  thousand  tons  of  said  freight  have  been  hauled  by  defendant 


NATURE  AND  CHARACTERISTICS  OF  FORMS  323 

carriers  since  the  contract  was  made.  On  such  shipments  the  brewing 
company  pays  to  the  carriers  the  full  tariff  rate,  and  the  carriers  pay 
the  transit  company  for  use  of  its  refrigerator  cars  for  mileage  three- 
fourths  of  a  cent  to  a  cent  per  mile,  and  in  addition  an  eighth  or  tenth 
of  the  sums  paid  them  by  the  brewing  company;  and  in  every  instance 
the  property  is  transported  by  defendant  carriers  at  an  eighth  or 
tenth  less  than  the  published  tariff.  Such  rebates  amount  to  many 
thousands  of  dollars,  the  exact  sum  unknown  to  complainants. 

(16)  All  the  defendant  carriers  well  knew  that  the  transit  company 
was  organized  in  the  interest  of  the  brewing  company,  and  for  the 
purpose  of  evading  the  law,  and  paid  such  rebates  with  like  intent 
and  purpose. 

(18)  The  transit  company  claims  and  pretends  that  such  repay- 
ments were  made  and  accepted  as  compensation  for  its  services  in 
soliciting  and  procuring  freight  for  carriage  by  defendants;  but  such 
claim  or  pretense  is  untrue.  The  transit  company  has  entire  control 
of  all  the  shipping  business  of  the  brewery,  comprising  almost  the 
entire  business  of  the  transit  company,  which  it  does  not  solicit; 
the  only  possible  consideration  moving  from  it  to  the  carrier  being 
its  refraining  to  divert  the  business.  All  such  repayments  have 
always  been  known  to  all  said  parties  to  be  a  device  of  unlawful 
rebate,  concession,  and  discrimination.  But  such  payments  constitute 
unlawful  concession  and  discrimination,  whether  or  not  the  transit 
company  solicits  the  shipments,  which,  if  not  so  solicited  and  procured, 
would  be  diverted  from  the  carrier  so  paying. 

Such  are  the  charges  of  the  bill  challenged  by  the  demurrers. 
Two  questions  are  presented:  Whether  the  payments  are  sufficiently 
shown  to  have  been  made  "by  any  device  whatever"  not  as  commis- 
sions, but  with  intent  to  evade  the  law;  and  whether  the  two  Wiscon- 
sin corporations  are  so  united  in  interest,  control,  and  management 
as  to  make  them  substantially  the  same. 

That  the  transit  company  is  controlled  by  the  managing  agents 
of  the  brewing  company  is  entirely  clear.  But  is  it  controlled  by  the 
shipper  corporation?  The  solution  of  this  question  depends  on 
whether  the  brewing  corporation,  in  a  case  like  this,  is  an  association 
of  individuals,  rather  than  a  legal  entity  apart  from  those  who  own 
and  control  it.  No  doubt  the  general  rule  that  a  corporation  is  a 
legal  entity,  and  an  institution,  artificial,  intangible,  existing  only  by 
legal  contemplation,  and  separate  and  apart  from  its  constituents  is 
firmly  imbedded  in  the  common  law  of  this  country.  It  has  been  so 


324  LAW  AND  BUSINESS 

laid  down  in  hundreds  of  cases.  In  the  Dartmouth  College  Case, 
CHIEF  JUSTICE  MARSHALL  adopted  and  expressed  it  almost  in  the 
exact  language  of  LORD  COKE,  in  Coke  on  Littleton,  2jb;  and  this 
definition  has  been  universally  approved,  especially  in  cases  involving 
the  extent  of  the  corporate  powers. 

A  stockholder  owning  nearly  all  the  stock  cannot  bind  the  corpora- 
tion by  a  contract  made  in  his  individual  capacity.  Donoghue  v. 
/.  6*  L.  M.  Railway  Co.,  87  Mich.,  13,  49  N.W.  512;  Finley  Shoe  & 
Leather  Co.  v.  Kurtz,  34  Mich.  89;  England  v.  Dearborn,  141  Mass. 
590,  6  N.E.  837.  It  seems  that  an  act  of  all  the  stockholders,  as 
individuals,  binds  the  corporation,  as  no  one  can  object.  Bundy  v. 
Iron  Co.,  38  Ohio  St.  300  (mortgage  by  all  but  one  stockholder,  to 
the  remaining  one,  of  corporate  property,  executed  in  the  individual 
names  of  the  stockholders,  held  valid).  A  corporation,  from  one 
point  of  view,  may  be  considered  an  entity,  without  regard  to  its 
shareholders,  yet  the  fact  remains  self-evident  that  it  is  not  in  reality 
a  person  or  thing  distinct  from  its  consistent  parts.  The  word 
corporation  is  but  a  collective  name  for  the  members  who  compose 
the  association. 

If  any  general  rule  can  be  laid  down,  in  the  present  state  of 
authority,  it  is  that  a  corporation  will  be  looked  upon  as  a  legal  entity 
as  a  general  rule,  and  until  sufficient  reason  to  the  contrary  appears; 
but,  when  the  notion  of  legal  entity  is  used  to  defeat  public  con- 
venience, justify  wrong,  protect  fraud,  or  defend  crime,  the  law  will 
regard  the  corporation  as  an  association  of  persons.  This  much  may 
be  expressed  without  approving  the  theory  that  the  legal  entity  is 
a  fiction,  or  a  mere  mental  creation;  or  that  the  idea  of  invisibility 
or  intangibility  is  a  sophism.  A  corporation,  as  expressive  of  legal 
rights  and  powers,  is  no  more  fictitious  or  intangible  than  a  man's 
right  to  his  own  home  or  his  own  liberty. 

Applying  the  rule  here  laid  down  to  the  circumstances  shown  to 
surround  the  brewing  company  and  transit  company,  can  it  be  doubted 
that  there  really  is,  in  substance  and  effect,  an  identity  of  interest, 
or  that  the  brewing  company,  considered  as  an  association  of  indi- 
viduals, really  owns  and  fully  controls  the  transit  company  ?  or  that 
the  payment  of  the  eighth  or  tenth  of  the  rate  is  in  reality,  and  in 
some  form,  a  payment  to,  or  for,  the  benefit  of  the  shipper  ?  I  think 
sufficient  is  alleged  to  show  this.  Moreover,  it  clearly  appears  that 
the  shipper  practically  controls  the  transit  company,  and  I  think 
this  shows  a  sufficient  identity  of  interest  among  the  shareholders  of 


NATURE  AND  CHARACTERISTICS  OF  FORMS  325 

both  in  these  repayments  to  make  them  rebates,  if  paid  and  received 
with  unlawful  intent.  It  is  said  that  the  procurement  of  the  ship- 
ments through  the  contract  is  the  mere  soliciting  of  them  for  the 
carriers,  for  which  they  are  lawfully  authorized  to  pay  a  part  of  the 
rate,  in  order  to  get  the  business;  and  the  transit  company,  owning 
a  large  number  of  refrigerator  cars,  and  wishing  to  keep  them 
employed,  simply  gives  the  freight  to  those  competing  shippers  who 
will  make  the  best  terms,  the  business  being  of  great  volume,  and 
the  sums  paid  for  freights  large.  But  this  theory  of  innocence  is 
exploded  by  the  fact,  as  alleged  (whatever  the  actual  proof  may 
show)  that  the  transit  company  is  a  mere  separate  name  for  the 
brewing  company,  being  in  fact  the  same  collection  of  persons  and 
interests.  Assuming  the  truth  of  the  averments,  the  device  adopted 
is  "neither  new,  nor  deserving  of  new  success."  As  the  patent 
lawyers  say  of  an  aggregation,  there  is  no  new  mode  of  operation, 
new  use,  or  new  result — simply  the  use  of  old  things  in  a  different 
situation. 

There  is  no  doubt  some  tendency  in  these  days  to  accept  general 
and  vague  charges  of  wrongdoing  on  the  part  of  the  corporations  at 
a  premium.  Much  has  happened  to  arouse  public  feeling  on  this 
sensitive  subject.  For  many  years  transportation  development  was 
encouraged  in  every  possible  way.  The  municipal  aid  craze  was  an 
early  form  of  such  stimulation.  Praise  for  those  who  were  seeking 
command  of  the  trade  of  the  world  was  unstinted  and  without 
dissent,  and  criticism  forgotten.  But  now  that  we  are  beginning  to 
feel  the  tyranny  of  arbitrary  and  overwhelming  industrial  and 
commercial  power,  the  tendency  is  to  go  to  the  other  extreme,  and  it 
becomes  easy  to  excite  prejudice  leading  to  injustice.  The  courts  will 
no  doubt  be  somewhat  influenced  by  such  tendency;  but  so  far  as 
possible  it  is  for  them  to  keep  fundamental  rules  steadily  in  view, 
and  with  discrimination  and  careful  reflection  see  to  it  that  injustice 
is  prevented.  Joseph  Cooke  once  facetiously  said  that  he  had  never 
traveled  in  Pennsylvania,  but  had  often  visited  the  domains  of  the 
Pennsylvania  Railroad  Co.  These  and  other  like  domains  are  now 
subject  to  widespread  attack;  but  it  will  not  be  forgotten  that  they 
are  our  domains,  and,  if  they  are  being  despoiled,  the  spoliation  is 
the  work  of  our  trustees,  who  must  indeed  be  brought  to  book,  but 
the  trust  property  at  the  same  time  preserved. 

The  demurrers  are  overruled,  and  the  motion  to  strike  out 
denied. 


326  LAW  AND  BUSINESS 

QUESTIONS 

1.  The  stockholders  of  ten  competing  corporations  met  and  informally 
agreed  to  transfer  their  stock  to  common  trustees  and  to  grant  to  them 
full  voting  power  of  the  stock  for  the  purpose  of  securing  concentrated 
control  of  the  various  competing  corporations.     This  is  a  proceeding 
against  one  of  the  corporations  to  forfeit  its  charter  on  the  ground  that 
it  has  entered  into  a  combination  in  restraint  of  trade.    What  decision  ? 

2.  D  sold  his  business  to  P  and  contracted  that  he  would  not  re-enter  the 
same  business  in  competition  with  P  for  a  period  of  five  years.     D,  with 
A  and  B,  immediately  promoted  a  corporation,  subscribed  for  90  per 
cent  of  its  stock,  and  began  business  in  competition  with  P.    What  are 
the  rights  of  P,  if  any,  against  D  ?  against  the  corporation  which  D 
organized  ? 

3.  To  what  extent  is  a  corporation  personified?    What  is  the  justification 
for  the  personification  of  a  corporation?    Under  what  circumstances 
will  the  court  disregard  the  corporate  fiction  ? 

4.  To  what  extent  is  a  partnership  personified  by  law  ? 

5.  What  are  the  advantages  and  disadvantages  of  conducting  a  business 
as  an  individual  enterpriser  ?    What  are  the  advantages  and  disadvan- 
tages of  conducting  a  business  through  agents  ? 

6.  What  are  the  advantages  and  disadvantages  of  a  partnership  as  an 
organization  device  for  carrying  on  business?  of  a  corporation?  of  a 
limited  partnership  ?  of  a  common  law  trust  company  ?  of  a  combination 
of  corporations  ? 


CHAPTER  III 

FORMATION  OF  THE  BUSINESS  UNIT 

i .    Promotion  of  the  Unit 
McARTHUR  v.  TIMES  PRINTING  COMPANY 

48  Minnesota  Reports  319  (1892) 

Action  for  breach  of  an  alleged  contract  of  employment.  The 
plaintiff  had  a  verdict  for  $450.  The  defendant  moved  for  a  new 
trial.  The  motion  was  denied  and  the  defendant  appealed. 

MITCHELL,  J.  The  complaint  alleges  that  about  October  i, 
1889,  the  defendant  contracted  with  plaintiff  for  his  services  as 
advertising  solicitor  for  one  year;  that  in  April,  1890,  it  discharged 
him,  in  violation  of  the  contract.  The  action  is  to  recover  damages 
for  the  breach  of  the  contract.  The  answer  sets  up  two  defenses: 
(i)  That  plaintiff's  employment  was  not  for  any  stated  time,  but  only 
from  week  to  week;  (2)  that  he  was  discharged  for  good  cause. 
Upon  the  trial  there  was  evidence  reasonably  tending  to  prove  that 
in  September,  1889,  one  C.  A.  Nimocks  and  others  were  engaged  as 
promoters  in  procuring  the  organization  of  the  defendant  company 
to  publish  a  newspaper;  that,  about  September  12,  Nimocks,  as  such 
promoter,  made  a  contract  with  plaintiff,  in  behalf  of  the  contemplated 
company,  for  his  services  as  advertising  solicitor  for  the  period  of 
one  year  from  and  after  October  i,  the  date  at  which  it  was  expected 
that  the  company  would  be  organized;  that  the  corporation  was 
not,  in  fact,  organized  until  October  16,  but  that  the  publication  of 
the  paper  was  commenced  by  the  promoters  October  i,  at  which 
date  plaintiff,  in  pursuance  of  his  arrangement  with  Nimocks,  entered 
upon  the  discharge  of  his  duties  as  advertising  solicitor  for  the  paper; 
that  after  the  organization  of  the  company  he  continued  in  its  employ- 
ment in  the  same  capacity  until  discharged,  the  following  April; 
that  defendant's  board  of  directors  never  took  any  formal  action  with 
reference  to  the  contract  made  in  its  behalf  by  Nimocks,  but  all  the 
stockholders,  directors,  and  officers  of  the  corporation  knew  of  this 
contract  at  the  time  of  its  organization,  or  were  informed  of  it  soon 
afterward,  and  none  of  them  objected  to  or  repudiated  it,  but,  on  the 

327 


328  LAW  AND  BUSINESS 

contrary,  retained  plaintiff  in  the  employment  of  the  company  without 
any  other  or  new  contract  as  to  his  services. 

There  is  a  line  of  cases  which  hold  that  where  a  contract  is  made 
in  behalf  of,  and  for  the  benefit  of,  a  projected  corporation,  the 
corporation,  after  its  organization,  cannot  become  a  party  to  the 
contract  either  by  adoption  or  ratification  of  it.  Abbot  v.  Hapgood, 
150  Mass.  248  (22  N.E.  Rep.  907),  Beach,  Corp.  section  198.  This, 
however,  seems  to  be  more  a  question  of  name  than  of  substance; 
that  is,  whether  the  liability  of  the  corporation,  in  such  cases,  is  to  be 
placed  on  the  grounds  of  its  adoption  of  the  contract  of  its  promoters, 
or  upon  some  other  ground,  such  as  equitable  estoppel.  This  court, 
in  accordance  with  what  we  deem  sound  reason,  as  well  as  the  weight 
of  authority,  has  held  that,  while  a  corporation  is  not  bound  by 
engagements  made  on  its  behalf  by  promoters  before  its  organization, 
it  may,  after  its  organization,  make  such  engagements  its  own  con- 
tracts. And  this  it  may  do  precisely  as  it  might  make  similar  original 
contracts;  formal  action  of  its  board  of  directors  being  necessary 
only  where  it  would  be  necessary  in  the  case  of  a  similar  original  con- 
tract. That  it  is  not  requisite  that  such  adoption  or  acceptance  be 
expressed,  but  it  may  be  inferred  from  acts  or  acquiescence  on 
part  of  the  corporation,  or  its  authorized  agents,  as  any  similar 
original  contract  might  be  shown.  Battelle  v.  Northwestern  Cement 
6s  Concrete  Pavement  Co.,  37  Minn.  89.  (33  N.W.  Rep.  327.)  See 
also,  Mor.,  Corp.  sec.  548.  The  right  of  the  corporate  agents  to  adopt 
an  agreement  originally  made  by  promoters  depends  upon  the  purposes 
of  the  corporation  and  the  nature  of  the  agreement.  Of  course  the 
agreement  must  be  one  which  the  corporation  itself  could  make, 
and  one  which  the  usual  agents  of  the  company  have  express  or 
implied  authority  to  make.  That  the  contract  in  this  case  was  of  that 
kind  is  very  clear;  and  the  acts  and  acquiescence  of  the  corporate 
officers,  after  the  organization  of  the  company,  fully  justified  the  jury 
in  finding  that  it  had  adopted  it  as  its  own. 

The  defendant,  however,  claims  that  the  contract  was  void  under 
the  statute  of  frauds,  because,  "by  its  terms,  not  to  be  performed 
within  one  year  from  the  making  thereof,"  which  counsel  assumes 
to  be  September  12 — the  date  of  the  agreement  between  plaintiff 
and  the  promoter.  This  proceeds  upon  the  erroneous  theory  that  the 
act  of  the  corporation,  in  such  cases,  is  a  ratification,  which  relates 
back  to  the  date  of  the  contract  with  the  promoter,  under  the  familiar 
maxim  that  "a  subsequent  ratification  has  a  retroactive  effect,  and  is 


FORMATION  OF  THE  BUSINESS  UNIT  3^9 

equivalent  to  a  prior  command."  But  the  liability  of  the  corporation, 
under  such  circumstances,  does  not  rest  upon  any  principle  of 
the  law  of  agency,  but  upon  the  immediate  and  voluntary  act  of  the 
company.  Although  the  acts  of  a  corporation  with  reference  tQ  the 
contracts  made  by  promoters  in  its  behalf  before  its  organization  are 
frequently  loosely  termed  "ratification, "yet a  "ratification"  properly 
so  called,  implies  an  existing  person,  on  whose  behalf  the  contract 
might  have  been  made  at  the  time.  There  cannot,  in  law,  be  a 
ratification  of  a  contract  which  could  not  have  been  made  binding 
on  the  ratifier  at  the  time  it  was  made,  because  the  ratifier  was  not 
then  in  existence.  In  the  Empress  Engineering  Co.,  16  Ch.  Div. 
128;  Melhado  v.  Porto  Alegre,  N.H.  &  B.  Railway  Co.,  L.R.  9  C.P. 
505;  Kelner  v.  Baxter,  L.R.  2  C.P.  185.  What  is  called  "adoption" 
in  such  cases,  is  in  legal  effect,  the  making  of  a  contract  of  the  date 
of  the  adoption,  and  not  as  of  some  former  date.  The  contract  in 
this  case  was,  therefore,  not  within  the  statute  of  frauds.  The  trial 
court  fairly  submitted  to  the  jury  all  the  issues  of  fact  in  this  case, 
accompanied  by  instructions  as  to  the  law  which  were  exactly  in  the 
line  of  the  views  we  have  expressed;  and  the  evidence  justified  the 
verdict. 

The  point  is  made  that  plaintiff  should  have  alleged  that  the 
contract  was  made  with  Nimocks,  and  subsequently  adopted  by  the 
defendant.  If  we  are  correct  in  what  we  said  as  to  the  legal  effect 
of  the  adoption  by  the  corporation  of  a  contract  made  by  a  promoter 
in  its  behalf  before  its  organization  the  plaintiff  properly  pleaded 
the  contract  as  having  been  made  with  the  defendant.  But  we  do 
not  find  that  the  evidence  was  objected  to  on  the  ground  of  variance 
between  it  and  the  complaint.  The  assignments  of  error  are  very 
numerous,  but  what  has  already  been  said  covers  all  that  are  entitled 
to  any  special  notice. 

Order  affirmed. 
QUESTIONS 

1.  What  is  a  promoter?    What  economic  functions  does  he  perform? 
What  legal  functions  does  he  perform  ? 

2.  What  is  meant  by  a  promotion  agreement?    Between  what  parties  is 
it  made  ?    What  subject-matter  does  it  usually  cover  ? 

3.  What  is  meant  by  the  prospectus  of  a  corporation?    What  subject- 
matter  does  it  cover  ?    What  functions  does  it  perform  ? 

4.  The  contract  in  the  principal  case  was  made  for  the  corporation,  but 
the  court  said  that  it  was  incapable  of  being  ratified  by  the  corporation. 
Why? 


330  LAW  AND  BUSINESS 

5.  The  court  said  that  the  corporation  adopted  the  contract  of  the  promoter 
with  the  plaintiff.     What  is  meant  by  adoption  in  this  connection? 
How  is  such  an  adoption  proved  ? 

6.  Is  a  promoter  bound  personally  by  contracts  which  are  made  in  the  pro- 
motion and  organization  of  a  corporation  ?    Can  he  enforce  such  con- 
tracts against  the  parties  with  whom  they  are  made  ? 

7.  P  transfers  a  patent  to  X  who  is  promoting  a  corporation  with  the 
understanding  that  the  patent  is  to  be  assigned  to  the  corporation 
when  it  comes  into  existence.     The  corporation  uses  the  patent  for  a  year 
but  refuses  to  pay  P  for  it.     P  brings  an  action  against  the  corporation 
for  the  reasonable  value  of  the  patent.     What  decision? 

8.  P  expends  considerable  time  and  money  in  bringing  the  D  Company 
into  existence  as  a  corporation.     He  brings  an  action  against  the  corpora- 
tion for  the  reasonable  value  of  his  services.     What  decision  ? 

9.  Would  your  answer  be  the  same  to  the  foregoing  case  if  the  directors  of 
the  corporation,  after  it  came  into  existence,  voted  to  compensate  P 
for  promotion  services  ? 

10.  In  some  states  statutes  provide  that  the  corporation  shall  upon  being 
organized  be  liable  in  a  reasonable  amount  for  promotion  services. 
Is  there  any  justification  for  such  a  statute  ? 

DENSMORE  OIL  COMPANY  v.  DENSMORE 

64  Pennsylvania  State  Reports  43  (1870) 

SHARSWOOD,  J.  There  are  two  principles  applicable  to  all 
partnerships  or  associations  for  a  common  purpose  of  trade  or  business, 
which  appear  to  be  well  settled  on  reason  and  authority. 

The  first  is,  that  any  man  or  number  of  men,  who  are  the  owners 
of  any  kind  of  property,  real  or  personal,  may  form  a  partnership  or 
association  with  others,  and  sell  that  property  to  the  association 
at  any  price  which  may  be  agreed  upon  between  them,  no  matter 
what  it  may  have  originally  cost,  provided  there  be  no  fraudulent 
misrepresentation  made  by  the  vendors  to  their  associates.  They' 
are  not  bound  to  disclose  the  profit  which  they  may  realize  by  the 
transaction.  They  were  in  no  sense  agents  or  trustees  in  the  original 
purchase  and  it  follows,  that  there  is  no  confidential  relation  between 
the  parties,  which  affects  them  with  any  trusts.  It  is  like  any  other 
case  of  vendor  and  vendee.  They  deal  at  arms'  length.  Their 
partners  are  in  no  better  position  than  strangers.  They  must  exercise 
their  own  judgment  as  to  the  value  of  what  they  buy.  As  it  is 
succinctly  and  well  stated  in  Foss  v.  Harbottle,  2  Hare,  489,  "  A  party 
may  have  a  clear  right  to  say,  I  begin  the  transaction  at  this  time. 


FORMATION  OF  THE  BUSINESS  UNIT  331 

I  have  purchased  land,  no  matter  how  or  from  whom,  or  at  what  price. 
I  am  willing  to  sell  it  at  a  certain  price  for  a  given  purpose."  This 
principle  was  recognized  and  applied  by  this  court  in  the  recent  case 
of  McElhenny' s  Administrators  v.  The  Hubert  Oil  Co.,  decided  May 
n,  1869  (n  P.  F.  Smith,  188).  "It  nowhere  appears,"  said  the 
present  CHIEF  JUSTICE,  "that  McElhenny,  the  purchaser  from 
Hubert,  the  original  owner,  did  it  as  the  agent  of  Messrs.  Baird, 
Boyd  &  Co.,  and  others,  though  he  bought  it  to  sell  again,  no  doubt; 
he  had  a  perfect  right,  therefore,  to  deal  with  them  at  arms'  length, 
as  it  seems  he  did."  And  again:  "If  the  property  was  not  purchased 
by  McElhenny  for  the  use,  and  as  agent  for  the  company,  but  for 
his  own  use,  he  might  sell  it  at  a  profit,  most  assuredly.  No  subse- 
quent purchasers  from  his  vendees  would  have  any  right  to  call  upon 
him  to  account  for  the  profits  made  on  his  sale."  In  that  case, 
McElhenny,  being  the  owner  of  property  which  had  cost  him  only 
$4,000,  sold  it  to  Baird,  Boyd  &  Co.,  and  others,  who  associated  with 
him  to  form  an  oil  company  for  $12,000,  and  it  was  decided  that  the 
company  could  not  call  him  in  equity,  to  account  for  the  profit  he 
had  made. 

The  second  principle  is,  that  where  persons  form  such  an  associa- 
tion or  begin  or  start  the  project  of  one,  from  that  time  they  do  stand 
in  a  confidential  relation  to  each  other  and  to  all  others  who  may  subse- 
quently become  members  or  subscribers,  and  it  is  not  competent  for 
any  of  them  to  purchase  property  for  the  purposes  of  such  a  company, 
and  then  sell  it  at  an  advance  without  a  full  disclosure  of  the  facts. 
They  must  account  to  the  company  for  the  profit,  because  it  legiti- 
mately is  theirs.  It  is  a  familiar  principle  of  the  law  of  partnership, 
that  one  partner  cannot  buy  and  sell  to  the  partnership  at  a  profit; 
nor  if  a  partnership  is  in  contemplation  merely,  can  he  purchase  with 
a  view  to  a  future  sale,  without  accounting  for  the  profit.  Within 
the  scope  of  the  partnership  business,  each  associate  is  the  general 
agent  of  the  others,  and  he  cannot  divest  himself  of  that  character 
without  their  knowledge  and  consent.  This  is  the  principle  of 
Hichens  v.  Congrove,  4  Russ.  562,  Fawcett  v.  Whitehouse,  i  Russ. 
&  M.  132,  and  the  other  cases  which  have  been  relied  on  by  the 
appellants.  It  was  recognized  in  McElhenny 's  Administrators  v. 
The  Hubert  Oil  Co.,  just  cited,  and  also  in  Simons  v.  The  Vulcan  Oil 
Co.,  decided  by  this  court,  May  n,  1869  (n  P.  F.  Smith,  202).  Both 
of  these  cases  were  complicated  with  evidence  of  actual  misrepresenta- 
tions as  to  the  original  cost  of  the  property  to  the  vendors.  In  the 


332  LAW  AND  BUSINESS 

opinion  of  the  court  in  the  last  case,  delivered  by  THOMPSON  C.  J., 
it  is  said: 

If  the  defendants  in  fact  acted  as  the  agents  of  the  company  in  acquiring 
the  property,  they  could  not  charge  a  profit  as  against  their  principal. 
Nor  was  their  position  any  better  if  they  assumed  so  to  act  without  precedent 
authority,  if  their  doings  were  accepted  as  the  acts  of  agents  by  the  associa- 
tion or  company.  If,  in  order  to  get  up  a  company,  they  represented  them- 
selves as  having  acted  for  the  association  to  be  formed,  and  proposed  to 
sell  at  the  same  prices  they  paid,  and  their  purchases  were  taken  on  these 
representations,  and  stockholders  invested  in  a  reliance  upon  them,  it  would 
be  a  fraud  on  the  company,  and  all  those  interested,  to  allow  them  to  retain 
the  large  profits  paid  them  by  the  company  in  ignorance  of  the  true  sums 
actually  advanced. 

The  defendants  in  that  case  were  subscribers  with  others,  to  the 
stock  of  a  projected  oil  company,  and  after  the  plan  had  been 
formed,  secured  to  themselves  by  contract,  the  refusal  of  the  property 
which  they  afterward  sold  to  the  company  at  a  greatly  advanced 
price. 

The  question  now  presented  is,  under  which  of  these  two  principles 
is  the  present  case  to  be  classified.  That  will  depend  upon  the  facts, 
which,  though  the  testimony  is  somewhat  voluminous,  may  be  briefly 
stated.  Densmore,  Roudebush,  and  Canfield,  three  of  the  defendants, 
were  the  owners  of  certain  lands,  leases,  and  rights,  in  Venango 
County,  in  the  oil  region.  They  had  acquired  them,  so  far  as  appears, 
with  no  idea  of  disposing  of  them,  or  of  forming  a  company,  but 
had  spent  over  $100,000  in  improving  and  developing  them  while 
they  were  owners.  In  March,  1864,  they  came  to  Philadelphia  to 
ascertain  whether  they  could  be  sold  to  advantage.  They  called 
upon  Mr.  Lawrence,  another  of  the  defendants,  and  consulted  him 
as  to  the  best  mode  of  affecting  this  object.  They  stated  that  they 
were  willing  to  accept  $202,000,  provided  the  sum  could  be  procured 
clear  of  all  expenses.  That  seemed  impossible,  unless  by  naming  a 
price  so  much  beyond  that  sum  as  would  cover  all  such  probable 
expenses  and  contingencies.  The  only  mode  by  which  so  large  an 
amount  could  be  realized,  was  by  the  organization  of  a  stock  company, 
and  to  do  that  effectively  persons  must  be  employed  as  agents  to  sell 
or  solicit  subscription  to  the  stock;  and  they  must  be  gentlemen  of 
character  and  influence,  well  acquainted  with  the  subject,  who  could 
bring  the  land  to  the  notice  of  those  desirous  of  engaging  in  such  an 
enterprise.  The  amount  to  be  raised  was  large,  the  result  uncertain. 


FORMATION  OF  THE  BUSINESS  UNIT  333 

Several  agents  must  be  employed,  and  their  compensation  must  be 
at  a  liberal  rate.  It  was  arranged  that  the  price  should  be  fixed  at 
$250,000;  that  the  stock  should  be  50,000  shares  at  $10  a  share,  and 
$5  to  be  paid  in  cash.  Mr.  Densmore  and  his  associates  agreed  to 
take  $122,500  in  money,  and  the  balance  in  stock  and  that  from  this 
stock  they  would  compensate  the  agents  for  their  services.  Mr. 
Densmore,  who  was  examined  as  a  witness  on  behalf  of  the  appellants, 
testified:  "The  $122,500  was  the  proceeds  of  the  sale  of  24,500 
shares.  That  added  to  the  16,000  shares  we  were  to  get,  amounted 
to  40,500  shares.  The  arrangement,  as  I  understood  it,  was  that 
Messrs.  Lawrence,  Hugel,  Watson,  and  perhaps  parties  unknown  to 
me,  were  to  receive  the  balance  of  the  stock  for  their  services  in  forming 
the  company,  and  disposing  of  the  stock."  The  gentlemen  named 
were  accordingly  engaged  for  this  purpose.  They  proceeded  and  did 
sell  the  24,500  shares  in  order  to  make  the  cash  payment.  There 
was  no  subscription  paper.  Mr.  Lawrence  and  his  associates  did 
not  subscribe  for  any  stock.  They  did  not  appear,  and  were  not  held 
out  as  subscribers  to  those  who  made  purchases  from  them.  It  is 
true,  that  after  the  company  was  organized,  the  stock  which  they 
were  to  receive  from  Densmore,  Roudebush,  and  Canfield,  as  a 
compensation  for  their  services,  was  issued  to  them  directly,  not  to 
the  vendors,  and  by  them  transferred.  But  this  was  done  by  a  special 
order,  as  is  satisfactorily  explained  in  the  testimony  of  E  .B.  Schneider: 
"I  heard  Mr.  Densmore  request  Mr.  Lawrence  to  have  the  Densmore 
stock,  which  he  [Mr.  Lawrence],  Watson,  Hugel,  and  Whitenery, 
were  entitled  to,  issued  direct  to  themselves,  as  he  might  not  be  here 
when  the  certificates  would  be  ready."  It  has  not  been,  and  cannot 
be,  controverted,  that  the  stock  which  they  received  was  part  of  that 
which  under  the  original  terms  of  sale,  Densmore,  Roudebush,  and 
Canfield,  were  to  have  in  payment  of  the  purchase  money. 

Now  it  can  hardly  be  questioned,  and  indeed,  apart  from  their 
alleged  liability  as  confederates  with  the  other  defendants  it  has  not 
been  questioned,  that  Densmore,  Roudebush,  and  Canfield  fall  within 
the  first  principle  hereinbefore  stated.  They  had,  for  a  considerable 
time,  been  the  owners  of  the  property,  had  acquired  it  with  no  refer- 
ence to  the  formation  of  this  or  any  other  company,  and  had  improved 
and  developed  it  by  a  very  large  outlay  of  their  own  capital.  They 
had  a  clear  and  undoubted  right  to  put  their  own  price  upon  it  in  the 
formation  of  a  company,  in  which  they  were  to  be  partners  or  associ- 
ates. They  did  put  upon  it  the  price  of  $250,000  which  it  is  admitted 


334  LAW  AND  BUSINESS 

at  the  rates  at  which  such  property  was  then  selling  in  the  market, 
was  a  fair  and  reasonable,  nay,  even  a  low  price.  "From  my  knowl- 
edge of  mining  properties  in  the  oil  region  at  the  time,"  said  N.  B. 
Browne,  Esq.,  in  his  testimony,  "and  especially  of  the  leasehold 
and  other  interests  conveyed  to  this  company,  I  regarded  their 
interests  at  the  price  named,  $250,000,  as  cheaper  than  any  that 
were  offered  in  this  market.  Their  actual  productive  value  was  very 
great;  the  leases  were  on  what  was  regarded  as  the  best  territory 
in  Oil  Creek."  Had  Messrs.  Densmore,  Roudebush,  and  Canfield 
employed  no  agents,  but  sold  all  the  stock  themselves,  the  transaction 
as  to  them  could  not  have  been  impeached.  They  certainly  stood 
in  no  confidential  relation  to  the  subscribers  or  purchasers  of  the  stock 
in  the  future,  when  they  acquired  the  property.  This  is  necessary, 
as  we  have  seen.  A  company  or  partnership  must  have  been  then 
forming  or  formed,  or  at  least  the  project  must  have  been  started, 
in  order  that  any  confidential  relation  should  arise.  How  then  is 
their  position  varied  by  the  fact  that  they  employed  agents  and  agreed 
to  compensate  these  agents  by  a  transfer  of  a  certain  part  of  the  stock 
they  were  to  receive?  It  is  not  easy  to  see.  The  whole  $250,000, 
money  and  stock,  when  received,  was  their  own  absolute  property; 
they  could  give  or  transfer  it  to  whomsoever  they  pleased.  If,  as 
we  have  seen,  they  stood  in  no  confidential  relation  to  the  company, 
no  trust  could  attach  to  the  price  or  any  part  of  it  in  their  hands. 
We  may  dismiss,  therefore,  the  case  of  Messrs.  Densmore,  Roudebush, 
and  Canfield  as  clearly  within  the  first  principle  to  which  we  have 
before  adverted. 

But  what  confidential  relation  did  the  other  defendants  sustain 
to  the  purchasers  of  the  stock  or  to  the  company  ?  It  is  a  clear  and 
unquestionable  fact  in  the  cause  that  they  did  not  subscribe  for  a  single 
share.  Their  contract  was  with  Densmore,  Roudebush,  and  Canfield 
to  receive  from  them  a  part  of  their  stock.  Without  an  order  from 
them,  Mr.  Lawrence  and  the  others  could  not  have  compelled  the 
company  to  issue  any  of  it  to  them.  If  Densmore,  Roudebush, 
and  Canfield  had  received  all  the  certificates  to  which  they  were 
entitled,  and  then  refused  to  transfer,  the  only  remedy  of  Messrs. 
Lawrence  and  others  would  have  against  them  to  recover  damages 
for  violation  of  their  contract.  It  is  clearly  proved  that  the  paper 
among  the  exhibits  headed  "Subscription  List  to  the  Densmore  Oil 
Company"  was  made  out  by  Mr.  Lawrence,  after  the  organization  as 
a  list  of  those  to  whom  certificates  of  stock  were  to  be  issued.  The 


FORMATION  OF  THE  BUSINESS  UNIT  335 

names  of  Lawrence,  Whitney,  Watson,  and  Hugel  appeared  on  the 
list,  but  clearly  only  as  appointees  or  assignees  of  Densmore,  Roude- 
bush,  and  Canfield.  The  same  appointment  or  order  might  have  been 
given  by  them  to  mere  strangers. 

It  is  strenuously  contended,  however,  that  if  these  defendants 
did  not  stand  in  a  confidential  relation  to  the  purchasers  of  stock, 
then  there  was  nobody  who  stood  in  that  relation.  But  is  there 
anything  extraordinary  in  that?  Nine-tenths  of  the  transactions 
and  contracts  of  life  are  at  arms'  length.  If  a  man  buys  stock  in 
the  market  of  a  broker,  there  is  nobody  who  stands  in  that  relation. 
He  acts  on  his  own  judgment.  He  is  bound  to  pay  the  broker  the 
price  agreed,  and  the  broker  is  bound  when  paid  to  deliver  him  the 
stock.  This  was  the  only  relation  in  which  Lawrence,  Whitney, 
Hugel,  and  Watson  stood  to  those  who  bought  stock  from  them, 
and  who,  according  to  all  the  testimony  in  the  cause,  so  understood 
it.  They  supposed,  as  they  state,  that  these  gentlemen  were  to  receive 
compensation  for  their  services.  What  it  was  to  be  they  did  not 
inquire,  because  it  was  none  of  their  business. 

A  strong  effort,  however,  has  been  made,  to  show  that  these 
defendants,  Lawrence,  Whitney,  Watson,  and  Hugel  were  purchasers 
from  Densmore,  Roudebush,  and  Canfield  of  an  interest  in  the 
property,  and  sold  it  at  an  advance.  But  of  this  there  is  not  a  spark 
of  evidence.  It  can  hardly  be  pretended  that  Densmore,  Roudebush, 
and  Canfield  could  have  held  them  liable  on  a  contract  to  purchase 
any  interest  in  the  land  or  that  the  agents  could  in  any  event  have 
sued  them  for  not  conveying  to  them  such  interest.  If  this  was  so, 
how  can  it  be  contended  that  they  were  vendors  of  any  part  of  the 
property  to  the  company  ? 

Densmore,  Roudebush,  and  Canfield  were  first  and  last  the  only 
vendors.  They  executed  the  deed,  and  very  properly  receipted  for 
the  whole  of  the  purchase  money,  for  they  were  entitled  to  the  whole 
of  it.  Nor  is  the  fact  that  Lawrence,  Whitney,  Watson,  and  Hugel 
joined  with  Densmore,  Roudebush,  and  Canfield,  as  original  corpo- 
rators, and  signed  the  articles  for  the  organization  of  the  company, 
under  the  act  of  July  18,  1863  (Pamph.  L.  1864,  p.  1102),  a  fact  of 
any  significance.  That  act  does  not  require  that  the  corporators 
should  be  subscribers  to  stock.  They  need  have  no  interest  whatever 
in  the  company  to  be  formed.  They  are  mere  instruments  of  the 
law  for  the  purposes  of  preliminary  organization.  The  moment  that 
is  accomplished,  the  amount  required  as  capital  paid  in,  the  necessary 


336  LAW  AND  BUSINESS 

certificate  signed,  and  the  charter  granted,  they  are  functi  officio. 
The  corporation  is  thenceforth  composed  of  the  stockholders. 

It  is  supposed  that  the  cases  of  McElhenny's  Administrators  v. 
The  Hubert  Oil  Co.  and  Simons  v.  The  Vulcan  Oil  Co.,  before  referred 
to,  ought  to  rule  this  cause.  But  an  examination  of  the  opinions  in 
those  cases  will  show  that  the  facts  upon  which  they  were  decided 
were  entirely  different  from  those  which  appear  on  this  record.  The 
defendants  there  were  subscribers  to  the  stock;  they  became  pur- 
chasers of  the  property  after  the  project  of  a  company  was  started 
and,  moreover,  falsely  represented  that  they  had  purchased  it  at  the 
same  price  at  which  they  sold. 

These  facts,  which  were  the  grounds  upon  which  those  determi- 
nations were  based,  are  not,  as  we  have  seen,  the  facts  of  this  case. 
It  is  not  pretended  that  any  false  representation  was  made  by  any 
of  these  defendants  in  the  sale  of  the  stock.  Some  other  points  have 
been  raised,  which  are,  however,  sufficiently  disposed  of  in  the  opinion 
below. 

Decree  affirmed  and  appeal  dismissed  at  the  cost  of  the  appellants. 

QUESTIONS 

1.  D,  owner  of  land  for  which  he  originally  paid  $5,000,  promoted  a  corpora- 
tion and  sold  the  land  to  it  for  $i  5,000.    This  is  an  action  by  the  corpora- 
tion against  D  for  $10,000  alleged  to  be  secret  profits  which  D  made  at 
the  expense  of  the  corporation.     What  decision  ? 

2.  D  bought  stock  in  the  corporation  and  was  elected  to  the  board  of 
directors.    He  thereupon  offered  the  land  to  the  corporation  for  $15,000. 
The  corporation  accepted  the  offer.     D  was  present  at  the  meeting  of 
the  directors  and  his  vote  was  necessary  to  the  corporate  action  in 
question.     What  decision  in  an  action  by  the  corporation  against  D  for 
secret  profits  ? 

3.  D  purchased  a  tract  of  land  for  $5,000,  intending  to  form  a  corporation 
to  which  the  land  should  be  sold.     He  later  sold  the  land  to  the  corpora- 
tion for  $15,000.     What  are  the  rights,   if   any,   of   the  corporation 
against  D  ? 

4.  D  buys  land  for  $5,000  intending  to  form  a  partnership  to  which  the  land 
should  be  sold.     The  firm  takes  the  land  over  at  a  valuation  of  $15,000. 
What  are  the  rights,  if  any,  of  the  firm  against  D  ? 

5.  A,  B,  and  C  organize  a  syndicate,  buy  mineral  properties,  reasonably 
worth   $1,000,000,    organize   a   corporation   with    a   capitalization    of 
$3,750,000,  divided  into  150,000  shares  of  stock  with  a  par  value  of 
$25  a  share.    When  the  corporation  came  into  existence  A,  B,  and  C 


FORMATION  OF  THE  BUSINESS  UNIT  337 

became  its  directors.  The  directors  immediately  voted  to  buy  the 
properties  from  the  syndicate  and  to  issue  130,000  shares  of  the  corporate 
stock  in  payment  therefor.  They  later  voted  to  sell  the  remaining 
20,000  shares  to  the  public  at  par  value.  This  is  an  action  by^  the 
corporation,  prosecuted  in  the  name  of  the  holders  of  the  20,000  shares 
of  stock  last  issued,  for  alleged  secret  profits  made  by  A,  B,  and  C. 
What  decision  ? 

6.  A,  B,  and  three  other  persons  owned  coal  land  worth  about  $25,000. 
They  organized  a  corporation  with  a  capitalization  of  $50,000  divided 
into  500  shares  at  $100  a  share.  The  corporation  purchased  the  land 
from  A,  B,  and  the  others  at  an  agreed  valuation  of  $40,000.  The 
corporation  issued  to  each  of  the  associates  80  shares  of  stock  in  the 
corporation  and  left  unissued  100  shares.  Two  years  later  it  was  found 
that  more  money  was  needed  to  carry  on  the  business  successfully. 
The  corporation  thereupon  offered  the  remaining  100  shares  of  stock 
to  the  public  at  par  value.  What  are  the  rights,  if  any,  of  the  purchasers 
of  this  stock  ? 


2.    Organization  of  the  Unit 
HAUG  v.  HAUG 

193  Illinois  Reports  645  (1901) 

The  Appellate  Court,  in  their  opinion  deciding  this  case,  make 
the  following  statement  of  facts,  to-wit: 

Appellee  filed  a  bill  in  chancery  in  the  circuit  court  of  Jasper  County 
against  appellant  to  require  him  to  account  to  her  as  administratrix  of  the 
estate  of  Martin  Haug,  deceased,  for  a  claimed  copartnership  interest  of 
deceased  in  a  mercantile  business,  carried  on  and  conducted  for  several  years 
by  appellant  and  deceased  as  copartners  at  Hunt  City,  under  the  name  of 
"  A.  Haug  &  Son, "  and  which  partnership  terminated  by  the  death  of  Martin 
Haug,  February  18,  1899. 

The  bill  prays  for  an  accounting  of  the  partnership  affairs,  also  for  an 
injunction  and  receiver. 

The  court  rendered  a  decree,  finding  that  the  deceased  and  appellant 
were  copartners,  and  that  appellant  should  account  to  appellee  for  one- 
fourth  of  the  partnership  assets  after  payment  of  the  debts  of  the  firm,  and 
that  appellant  pay  the  costs. 

An  appeal  was  taken  from  the  decree,  so  rendered  by  the  circuit 
court,  to  the  Appellate  Court,  and  the  Appellate  Court  has  affirmed 
the  decree.  The  present  appeal  is  prosecuted  from  such  judgment 
of  affirmance. 


338  LAW  AND  BUSINESS 

MAGRUDER,  J.  The  appellant,  Andrew  Haug,  Sr.,  was  the  father 
of  Martin  Haug,  deceased,  whose  widow  and  administratrix  filed  this 
bill  for  an  accounting.  It  is  undisputed  that  the  appellant  and  his 
son,  Martin,  did  business  together  under  the  firm  name  of  "A.  Haug 
&  Son "  for  a  number  of  years.  They  dealt,  as  such  firm,  in  hardware, 
furniture,  and  agricultural  implements. 

There  is  no  evidence  in  the  record  of  any  express  contract  of 
partnership,  or  written  agreement  of  partnership,  between  the  parties. 
It  is  well  settled,  however,  that  written  articles  of  agreement  are  not 
necessary  to  constitute  a  partnership,  but  that  a  partnership  may 
exist  under  a  verbal  agreement.  (Bopp  v.  Fox,  63  111.  540.)  The 
existence  of  a  partnership  may  be  implied  from  circumstances. 
(Kelleher  v.  Tisdale,  23  111.  405.)  A  partnership  may  arise  out  of  an 
arrangement  for  a  joint  business,  wherein  the  word  " partnership" 
may  not  have  been  used.  "If  there  is  such  a  joinder  of  interests 
and  action  as  the  law  will  consider  as  equivalent,  and  regards  as  in 
effect,  constituting  a  partnership,  it  will  give  to  the  persons  so  engaged 
all  the  rights,  and  lay  upon  them  all  the  responsibilities  and  to  give 
third  persons  all  the  remedies  which  belong  to  a  partnership."  (Morse 
v.  Richmond,  6  111.  App.  166.) 

It  is  also  well  settled  that  when,  by  agreement,  persons  have  a  joint 
interest  of  the  same  nature  in  a  particular  adventure,  they  are  partners 
inter  se,  although  some  contribute  money  and  others  labor.  Such  a 
partnership  may  well  exist,  although  the  whole  capital  is  in  the  first 
instance  advanced  by  one  party,  and  the  other  contributes  only  his 
time  and  skill  and  ability  in  the  selection  and  purchase  of  the  com- 
modities. (Robbins  v.  Laswell,  27  111.  365.) 

The  most  significant  circumstance,  bearing  upon  the  question 
whether  or  not  there  was  a  partnership  between  the  appellant  and  his 
deceased  son,  is  the  fact  that  they  did  business  together  under  the 
firm  name  of  "A.  Haug  &  Son."  The  proof  shows  conclusively  that 
the  son  here  referred  to  was  the  deceased  son,  Martin,  and  that  the 
two  members  of  the  firm  of  A.  Haug  &  Son  were  the  appellant  and  his 
son,  Martin.  The  fact  that  the  parties  do  business  together  under 
a  firm  name  is  a  circumstance  which,  although  not  conclusive  by 
itself,  may  be  considered  by  a  court  or  jury,  in  connection  with 
other  circumstances,  in  determining  the  question  whether  or  not  a 
partnership  exists  between  the  parties.  (Fulton  v.  MacCracken, 
18  Md.  544.) 


FORMATION  OF  THE  BUSINESS  UNIT  339 

In  deciding  this  case  the  Appellate  Court  well  say  in  their  opinion : 

The  fact  that  the  business  was  conducted  in  the  name  of  "A.  Haug 
&  Son"  coupled  with  the  fact  that  Andrew  Haug  and  his  son,  Martin,  each 
personally  gave  his  attention  to  the  business,  raises  a  strong  presumption 
that  they  were  copartners  in  fact,  and,  while  such  evidence  alone  is  not 
conclusive,  we  are  not  able  to  say  that  it,  with  other  strong  evidence, 
produced  by  appellee,  tending  to  establish  the  fact  of  a  partnership,  is  over- 
come by  appellant's  witnesses,  though  more  numerous  than  the  witnesses 
produced  by  appellee.  We  are  unable  to  say  the  finding  of  the  chancellor 
is  not  supported  by  the  greater  weight  of  the  evidence. 

It  was  shown  in  evidence,  that  the  appellant,  in  the  lifetime  of 
his  son,  Martin,  spoke  of  the  latter  as  being  his  partner.  In  a  suit 
brought  against  the  firm  of  A.  Haug  &  Son,  the  appellant  testified 
that  he  and  his  son,  Martin,  were  partners.  Witnesses  testified  that 
they  were  told  by  appellant  that  his  son,  Martin,  was  his  partner. 

After  the  decease  of  Martin  Haug,  the  appellant  stated  to  several 
persons,  who  approached  him  upon  the  subject  of  buying  goods,  that 
he  was  not  prepared  to  do  anything  in  that  direction  until  he  effected 
a  settlement  with  the  widow  of  his  son.  In  this  connection  he  also 
stated  that  he  did  not  know  whether  his  son's  widow,  the  present 
appellee,  would  continue  in  the  business  or  not. 

On  the  other  hand,  quite  a  number  of  witnesses  say  that  they 
were  told  by  Martin  Haug  in  his  lifetime  that  he  was  not  a  partner  in 
the  firm.  On  some  occasions  when  this  statement  was  made  by 
Martin,  it  was  in  an  answer  to  the  applications  of  customers  who 
desired  to  purchase  goods  upon  credit.  In  such  cases  he  would  not 
infrequently  refer  them  to  his  father,  saying  that  he  had  no  interest 
in  the  matter. 

It  thus  appears  that  the  testimony  as  to  the  existence  of  the 
partnership  is  conflicting.  It  is  unnecessary  for  us  to  examine  and 
discuss  this  testimony.  Upon  the  trial  below,  all  the  witnesses  upon 
both  sides  testified  orally.  They  were  seen  by  the  chancellor,  and 
their  manner  of  testifying  and  their  credibility  were  considered  by 
him.  The  question  of  the  existence  of  a  partnership  was  a  question 
of  fact.  This  case,  therefore,  is  one  which  calls  for  the  application 
of  the  well-settled  rule,  often  announced  by  this  court,  that  "when 
the  trial  court  has  an  opportunity  of  seeing  the  witnesses  and  of 
hearing  their  testimony  as  it  is  delivered  orally,  the  findings  of  such 
court  upon  mere  questions  of  fact,  where  the  testimony  is  conflicting, 


340  LAW  AND  BUSINESS 

will  not  ordinarily  be  disturbed  on  appeal,  unless  such  findings  are 
clearly  and  manifestly  against  the  preponderance  of  the  evidence." 
(Lane  v.  Lesser,  135  111.  567;  Williams  v.  Thwing  Electric  Co.,  160 
id.  526;  Burgett  v.  Osborne,  171  id.  227.)  We  have  examined  the 
testimony  carefully  and  are  unable  to  say  that  it  preponderates  in 
favor  of  the  appellant.  As  the  courts  below  have  found  the  facts  to 
be  as  testified  to  by  the  witnesses  of  the  appellee,  it  is  not  our  duty 
to  disturb  their  findings. 

We  concur  with  the  statement  of  the  Appellate  Court  in  their 
opinion  to  the  following  effect:  "Without  stopping  to  point  it  out, 
some  of  the  evidence,  given  by  witnesses  for  appellee,  is  more  convinc- 
ing to  our  minds  that  appellant  fully  understood  that  his  son  was 
a  copartner  with  him  in  the  mercantile  business,  carried  on  at  Hunt 
City,  than  the  evidence  of  other  witnesses  adduced  to  establish 
the  contrary." 

For  the  reasons  above  stated,  the  judgment  of  the  Appellate 
Court,  affirming  the  decree  of  the  circuit  court,  is  affirmed. 

Judgment  affirmed. 

QUESTIONS 

1.  What  test  does  this  case  lay  down  for  determining  whether  or  not  a  given 
relation  is  a  partnership  relation  ? 

2.  Are  articles  of  partnership  necessary  to  the  existence  of  the  partnership 
relation  ?    What  functions  do  articles  of  partnership  perform  ? 

3.  Typically  what  matters  are  covered  by  partnership  articles?    Need 
jthey  as  a  general  rule  be  drawn  up  in  any  particular  form  ? 

4.  Is  a  firm  name  necessary  to  the  existence  of  a  partnership?    What 
functions  does  a  firm  name  perform?    In  general  what  kind  of  name 
may  be  chosen  as  a  firm  name  ? 

5.  What  matters  should  be  carefully  watched  in  drawing  up  articles  for 
a  limited  partnership  ? 

6.  What  rule  is  laid  down  by  the  case  of  White  v.  Eiseman,  supra,  page  289, 
with  respect  to  the  organization  of  a  limited  partnership  ? 


SODIKER  v.  APPLEGATE 
24  West  Virginia  Reports  411  (1884) 

SNYDER,  J.  Suit  in  equity  brought  by  William  Sodiker  against 
Lewis  Applegate  in  June,  1879,  in  the  circuit  court  of  Brooke  County 
to  settle  the  accounts  of  an  alleged  partnership  between  the  plaintiff 


FORMATION  OF  THE  BUSINESS  UNIT  341 

and  defendant  for  running  a  grist-  and  flourmill,  buying  and  selling 
grain  and  the  products  of  said  mill.  The  bill  avers  that  by  the  terms 
of  the  partnership  the  defendant  was  to  furnish  the  gristmill  then 
owned  by  him  and  put  the  same  in  repair  at  his  own  expense  the 
plaintiff  was  to  run  and  operate  the  mill,  the  funds  for  carrying  on 
the  business  and  keeping  the  mill  in  repair  were  to  be  furnished  by 
the  parties  in  equal  portions  and  the  profits  were  to  be  shared  equally 
between  them. 

The  defendant  in  his  answer  positively  denies  that  any  partnership 
of  any  kind  existed  between  him  and  the  plaintiff;  he  avers  that  while 
the  plaintiff  worked  at  his  mill  he  did  so  as  a  hired  hand,  and  that  being 
without  means  and  penniless  he  was  employed  to  run  the  mill  so  long  as 
he  might  do  so  satisfactory  to  the  defendant  and  the  customers  of  the 
mill.  The  cause  was  referred  to  a  commissioner  for  an  account, 
depositions  taken  and  the  commissioner  reported  that  in  his  opinion 
no  partnership  existed,  but,  if  the  court  should  decide  that  the  proofs 
established  a  partnership,  he  reported  due  to  the  plaintiff  $126.87. 

The  plaintiff  excepted  to  that  part  of  the  report  which  found  that 
no  partnership  existed  and  the  court  by  its  decree  of  June  14,  1883, 
sustained  said  exception  and  decreed  that  the  plaintiff  recover  from 
the  defendant  the  said  sum  of  $126.87  and  costs.  From  this  decree 
defendant  appealed. 

As  I  am  clearly  of  opinion  that  no  partnership  existed  between 
the  plaintiff  and  defendant,  it  is  only  necessary  to  refer  to  the  evidence 
in  relation  to  that  matter.  The  plaintiff  in  his  deposition,  after 
stating  the  terms  of  the  partnership  as  alleged  in  his  bill,  says:  "I  did 
grind  the  wheat  I  bought  with  my  own  money  and  sold  the  flour  on 
my  own  account  and  got  the  money.  The  wheat  that  Lewis  Applegate 
bought  I  ground,  took  the  toll  from,  and  Applegate  sold  the  flour  on 
his  own  account.  All  the  other  grain  that  came  into  the  mill  was 
disposed  of  in  the  same  way."  He  exhibits  with  his  own  deposition, 
and  testifies  to  their  correctness,  certain  accounts  for  work  done  by  him 
and  for  bills  paid  for  repairs  to  the  mill,  for  boarding  hands  and  for 
money  paid  for  wheat,  all  of  which  are  made  out  in  his  name  against 
the  defendant.  The  one-half  of  these  accounts  is  what  constitutes  the 
sum  found  by  the  commissioner  and  on  which  the  decree  against 
the  defendant  is  based.  There  are  no  credits  on  any  of  these  accounts 
and  no  charges  of  any  kind  in  favor  of  the  defendant.  Nothing  appears 
as  to  the  business  of  the  alleged  partnership.  No  charges  in  favor 
of  or  against  it.  In  fact  there  is  not  in  the  evidence  or  the  accounts 


342  LAW  AND  BUSINESS 

filed  anything  having  any  relation  to  the  affairs  of  any  partnership  or 
anything  to  show  that  any  partnership  business  was  done  from  which 
any  profits  or  losses  could  have  arisen.  If  any  partnership  existed 
the  facts  altogether  fail  to  show  it.  The  accounts  filed  and  relied 
on  by  the  plaintiff  are  simply  charges  alleged  to  be  due  to  him  indi- 
vidually from  the  defendant.  They  are  made  out  not  against  any 
firm  but  against  the  defendant  personally.  They,  therefore,  disclose 
on  their  face  that  the  plaintiff  did  not  regard  them  as  partnership 
accounts,  but  merely  as  items  due  to  him  from  the  defendant  for 
work  done,  money  paid,  etc.,  for  the  use  of  the  defendant  as  an 
individual.  For  these  claims,  if  they  be  just,  the  plaintiff  has  a  plain 
and  adequate  remedy  by  action  of  assumpsit  at  law. 

The  plaintiff  was  the  person  who  had  charge  of  the  business  and, 
if  there  was  any  partnership,  he  was  the  partner  to  render  an  account 
and  not  the  defendant.  There  are  no  allegations  or  proofs  anywhere 
in  the  record  that  there  are  any  assets  or  debts  belonging  to  or  due 
from  the  alleged  partnership.  If  there  were  any  assets  or  profits 
they  ought  to  be  in  the  hands  of  the  plaintiff  as  the  acting  partner, 
and,  therefore,  cause  for  a  suit  might  exist  against  him  for  an  account, 
but  it  is  difficult  to  conceive  why  he  should  have  occasion  to  sue  the 
defendant,  who  had  nothing  to  do  with  the  management  of  the 
alleged  partnership.  If  the  accounts  and  transactions  disclosed  in 
this  record  constitute  a  partnership  and  entitle  the  plaintiff  to  maintain 
this  suit,  then  not  only  would  every  employee  be  a  partner  of  his 
employer,  but  every  person  who  had  a  private  account  against  another 
could  sue  his  debtor  as  a  partner  in  a  court  of  equity  and  recover. 

It  is  apparent  from  the  evidence  in  this  cause  that  no  partnership 
existed.  The  only  agreement  between  the  plaintiff  and  defendant  is 
stated  by  the  plaintiff  when  he  says:  "My  agreement  was,  Mr. 
Applegate  to  furnish  me  a  house  to  live  in  and  I  was  to  have  the  half. 
It  was  to  be  half  and  half  between  us.  Inside  repairs  of  the  mill 
were  to  be  done  by  me,  and  half  of  the  expenses  to  be  paid  by  each. 
Outside  repairs  to  be  paid  by  Lewis  Applegate;  was  no  agreement 
by  us  as  to  losses." 

The  evident  meaning  of  this  language  as  shown  by  the  other 
testimony  and  facts  is  that  the  plaintiff  was  employed  by  the  defendant 
to  take  charge  of  his  mill  as  miller,  and  for  his  services  in  that  behalf 
the  plaintiff  was  to  receive  one-half  the  tolls  or  earnings  of  the  mill. 
The  half  of  the  earnings  or  profits  to  which  the  plaintiff  thus  became 
entitled  did  not  make  him  a  partner.  This  merely  constituted  the 


FORMATION  OF  THE  BUSINESS  UNIT  343 

manner  of  payment  and  the  measure  of  his  compensation  for  his  service 
as  miller. 

To  constitute  a  partnership  between  the  parties  who  share  in 
the  profits,  the  interest  in  the  profits  must  be  mutual;  that  is, -each 
person  must  have  a  specific  interest  in  the  profits  as  a  principal  trader ; 
he  is  not  a  partner  if  he  merely  receives  out  of  the  profits  a  compensa- 
tion for  his  services  as  an  agent,  employee,  or  servant.  Collyer  on 
Par  I.,  section  31.  Thus,  where  A  purchased  goods  for  an  adventure  on 
the  credit  of  B,  and  it  was  agreed,  "  that,  if  any  profits  should  arise  from 
the  business,  B  should  have  one-half  for  his  trouble,  it  was  held  that 
this  was  not  a  partnership  between  the  parties."  Hesketh  v.  Blanch- 
ard,  4  East,  144.  In  all  cases  there  must  be  a  participation  as 
principal.  If  the  persons  merely  occupy  the  relation  of  principal 
and  agent,  employer  or  employee,  or  factor,  no  partnership  can 
be  predicated  upon  the  fact  that  such  agent,  employee,  or  factor 
receives  a  part  or  share  of  the  profits  for  his  services  or  other  benefits 
conferred.  This  proposition  is  illustrated  by  numerous  cases,  among 
which  are  the  following:  Berthold  v.  Goldsmith,  24  How.  542;  Barckle 
v.  Eckhart,  i  Den.  341;  Bowyer  v.  Anderson,  2  Leigh,  550;  Chapline 
v.  Conant,  3  W.Va.  507;  Dils  v.  Bridge,  23  Id.  20;  Hanna  v.  Flint, 
14  Cal.  73;  Morgan  v.  Stearnes,  41  Vt.  397. 

In  every  partnership  there  is  a  community  of  interest,  but  every 
community  of  interest  does  not  create  a  partnership.  There  must 
be  a  joint  ownership  of  the  partnership  funds,  or  a  joint  right  of  control 
over  them  and  also  an  agreement  to  share  the  profits  and  losses  arising 
therefrom.  Thus  an  agreement  between  A  and  B  that  A  shall  work 
B's  farm  upon  shares  and  divide  the  produce  does  not  constitute  them 
partners  inter  sese  or  as  to  third  persons.  Putnam  v.  Wise,  i  Hill, 
234.  Nor  are  the  owners  of  real  estate  who  contract  with  mechanics 
to  build  a  mill  or  other  building  upon  their  land  partners  inter  sese, 
but  either  party  paying  more  than  his  share  of  the  expense  of  the 
construction,  may  recover  such  excess  of  the  other  owner  in  assumpsit. 
Porter  v.  McClure,  15  Wend.  187. 

It  is  unnecessary  to  illustrate  further  what  particular  facts  and 
agreements  do  or  do  not  constitute  a  partnership.  The  books  are 
full  of  nice  distinctions  and  definitions  showing  that  it  is  often  difficult 
to  decide  to  which  class  the  particular  facts  and  circumstances  assign 
cases.  In  the  case  before  us,  however,  there  is  no  such  difficulty. 
Under  none  of  the  authorities  or  definitions  could  this  be  classed  as  a 
partnership. 


344  LAW  AND  BUSINESS 

I  am,  therefore,  of  opinion"  that  the  decree  complained  of  must  be 
reversed  with  costs  to  the  appellant  and  the  plaintiff's  bill  dismissed 
with  costs. 

QUESTIONS 

1.  What  test  does  this  case  announce  for  determining  whether  a  given 
relation  between  business  associates  is  a  partnership  ? 

2.  A  and  B  are  engaged  in  the  milling  business.     C  sues  them  as  partners 
on  a  debt  arising  out  of  the  business.    He  offers  evidence  that  A  and  B 
are  co-owners  of  the  property,  and  that  there  is  an  agreement  between 
them  to  divide  gross  returns  of  the  business  equally  between  them. 
Should  the  evidence  be  admitted  ? 

3.  A  and  B  are  engaged  in  the  grocery  business.     A  is  the  owner  of  all  the 
property  used  in  the  business.     C  sues  A  and  B  as  partners  and  offers 
evidence  tending  to  show  there  is  an  agreement  between  the  parties 
that  B  shall  be  entitled  to  one-third  of  the  net  profits.     Should  the 
evidence  be  admitted  ? 

4.  In  the  foregoing  case,  C  offers  evidence  of  an  agreement  that  A  and  B 
shall  share  the  profits  and  bear  the  losses  of  the  business  equally.     Should 
the  evidence  be  admitted  ? 

5.  To  what  extent  is  mutual  agency  to  be  considered  a  test  of  the  existence 
of  a  partnership  ? 

6.  Can  there  be  such  a  thing  as  a  partnership  between  A  and  B  in  favor  of 
creditors  and  no  partnership  as  between  themselves  ? 

PEOPLE  v.  FORD 
294  Illinois  Reports  319  (1920) 

DUNN,  J.  The  Fifty-first  General  Assembly  passed  an  act  in 
relation  to  corporations  for  pecuniary  profit,  known  as  the  General 
Corporation  Act,  which  was  approved  on  June  28,  and  became 
effective  July  i,  1919.  (Laws  of  1919,  p.  3i6.)z  Section  4  provides 

1  SECTION  2.  Corporations  may  be  organized  in  the  manner  provided  in  this 
act  for  any  lawful  purpose,  except  for  the  purpose  of  banking,  insurance,  real  estate 
brokerage,  the  operation  of  railroads,  or  the  business  of  loaning  money. 

SEC.  4.  Whenever  three  or  more  adult  persons,  citizens  of  the  United  States  of 
America,  at  least  one  of  whom  shall  be  a  citizen  of  this  State,  shall  desire  to  form  a 
corporation  under  this  act,  they  shall  sign,  seal  and  acknowledge  before  some 
officer,  competent  to  take  acknowledgment  of  deeds,  a  statement  of  incorporation 
setting  forth  the  following: 

1.  The  names  and  postoffice  addresses  of  the  incorporators; 

2.  The  name  of  the  proposed  corporation; 

3.  A  clear  and  definite  statement  of  the  object  or  objects  for  which  it  is  formed; 

4.  The  period  of  duration; 

5.  The  location  of  its  principal  office  in  this  State,  giving  town,  or  city,  street 
and  number  if  any; 

6.  The  number  of  shares  into  which  the  capital  stock  is  to  be  divided,  whether 
all  or  part  of  the  same  shall  have  a  par  value,  and  if  so,  the  par  value  thereof  which 


FORMATION  OF  THE  BUSINESS  UNIT  345 

that  "  whenever  three  or  more  adult  persons,  citizens  of  the  United 
States  of  America,  at  least  one  of  whom  shall  be  a  citizen  of  this  state, 
shall  desire  to  form  a  corporation  under  this  act,  they  shall  sign, 
seal,  and  acknowledge  before  some  officer,  competent  to  take  acknowl- 
edgment of  deeds,  a  statement  of  incorporation  setting  forth  the 
following:"  (Here  follow  thirteen  paragraphs  stating  the  facts  to  be 
contained  in  the  statement.)  The  section  closes  with  the  sentence 
that  "such  statement  shall  be  filed  in  duplicate  in  the  office  of  the 
Secretary  of  State  on  forms  prescribed  and  furnished  by  the  Secretary 
of  State."  Section  5  provides  that  "  upon  the  filing  of  such  statement, 

shall  not  be  less  than  five  dollars,  nor  more  than  one  hundred  dollars,  per  share, 
and  whether  all  or  part  of  the  same  shall  have  no  par  value,  and,  if  there  is  to  be 
more  than  one  class  of  stock  created,  a  description  of  the  different  classes,  the 
number  of  shares  in  each  class,  and  the  relative  rights,  interests  and  preferences 
each  class  shall  represent; 

7.  The  names  and  addresses  (giving  street  and  number)  of  the  original  sub- 
scribers to  the  capital  stock,  and  the  amount  subscribed  by  each; 

8.  The  total  amount  of  authorized  capital  stock; 

9.  The  amount  of  such  stock  which  it  is  proposed  to  issue  at  once  (which  shall 
not  be  less  than  one  thousand  dollars) ; 

10.  The  payment  of  at  least  one-half  of  the  capital  stock  having  a  par  value 
and  of  not  less  than  five  dollars  per  share  for  each  share  of  capital  stock  having  no 
par  value,  which  it  is  proposed  to  issue  at  once,  with  a  description  of  the  nature 
and  value  of  property,  if  any,  paid  for  such  capital  stock; 

11.  The  number,  names  and  postoffice  addresses  of  the  directors,  by  street 
and  number,  at  least  one  of  whom  shall  be  a  resident  of  this  State  and  the  term 
for  which  elected; 

12.  In  the  case  of  a  building  corporation,  a  specific  and  definite  description  of 
the  site  for  such  building; 

13.  Any  other  provisions,  not  inconsistent  with  law,  for  the  regulation  of  the 
business  and  the  conduct  of  the  affairs  of  the  corporation,  and  any  provisions 
creating,  defining,  limiting  and  regulating  the  powers  of  the  corporation,  the 
directors  and  the  stockholders  or  any  class  or  classes  of  stockholders.     Such 
statement  shall  be  filed  in  duplicate  in  the  office  of  the  Secretary  of  State  on  forms 
prescribed  and  furnished  by  the  Secretary  of  State. 

SEC.  5.  Upon  the  filing  of  such  statement,  the  Secretary  of  State  shall  examine 
the  same,  and,  if  it  is  in  conformity  with  the  provision  of  this  act,  he  shall  indorse 
thereon  the  word  "filed"  followed  by  the  month,  day,  and  year  of  such  filing. 
Upon  such  filing  the  corporation  shall  be  deemed  fully  organized  and  may  proceed 
to  business. 

The  Secretary  of  State  shall  also  issue  a  certificate  of  incorporation  to  the 
incorporators,  making  a  part  of  such  certificate  a  copy  of  all  papers  filed  in  his  of- 
fice, using  for  that  purpose  duplicate  copies,  if  any,  filed  therein,  duly  authenticated 
under  his  hand  and  the  seal  of  State.  A  copy  of  such  certificate  of  incorporation 
shall  be  prepared  and  filed  by  the  Secretary  of  State  in  his  office. 


34&  LAW  AND  BUSINESS 

the  Secretary  of  State  shall  examine  the  same,  and,  if  it  is  in  conformity 
with  the  provisions  of  this  act,  he  shall  indorse  thereon  the  word 
'filed'  followed  by  the  month,  day  and  year  of  such  filing.  Upon 
such  filing  the  corporation  shall  be  deemed  fully  organized  and  may 
proceed  to  business."  On  September  5,1  919,  a  certificate  of  incorpo- 
ration of  the  Washer  Maid  Co.,  was  filed  in  duplicate  in  the  office  of 
the  Secretary  of  State.  The  attorney-general  afterward,  by  leave 
of  the  court,  filed  in  the  circuit  court  of  Cook  County  an  information 
in  the  nature  of  quo  warranto  against  E.  E.  Ford,  A.  J.  Fisher,  and 
C.  R.  Gilbert,  charging  them  with  having  unlawfully  usurped, 
intruded  into,  held,  and  executed  the  office  of  directors  of  a  pretended 
corporation  known  as  the  Washer  Maid  Co.  under  color  of  a  void  and 
illegal  certificate  of  incorporation,  and  calling  upon  them  to  show 
by  what  warrant  they  exercised  such  privileges.  The  respondents 
filed  a  plea  showing  the  various  steps  taken  for  the  organization  of 
the  corporation,  setting  forth  in  haec  verba  the  statement  filed  by 
them,  alleging  that  it  was  made  on  forms  prescribed  and  furnished 
by  the  secretary  of  state,  which  were  executed  and  acknowledged 
by  the  respondents,  and  that  the  respondents  had  in  all  respects 
complied  with  the  requirements  of  the  General  Corporation  Act. 
The  attorney-general  demurred  and  for  special  cause  of  demurrer 
showed  that  the  respondents  in  their  statement  of  incorporation  did  not 
sign,  seal,  and  acknowledge  the  same,  but,  on  the  contrary,  failed  to 
seal  the  same  or  to  affix  their  seals  to  said  statement  of  incorporation, 
as  required  by  the  General  Corporation  Act.  The  statement  set 
forth  in  the  plea  shows  the  signatures  of  the  respondents  as  follows: 

E.  E.  FORD  ] 

A.  J.  FISHER  I  Incorporators 

CHAS.  R.  GILBERT  J 

The  word  "seal"  does  not  appear,  nor  are  there  any  letters, 
scrawl,  or  marks  which  might  be  regarded  as  a  seal  unless  it  is  the 
bracket  which  joins  the  names,  and  neither  the  statement  itself  nor 
the  certificate  of  acknowledgment  contains  any  reference  to  a  seal. 
The  court  overruled  the  demurrer,  and  the  attorney-general  electing 
to  stand  by  it,  the  information  was  dismissed.  An  appeal  was 
taken,  and  at  the  June  term  the  cause  was  submitted  with  a  request 
by  both  parties  for  an  early  decision  because  of  the  public  importance 
of  the  question  involved.  It  was  stated  that  more  than  4,300  corpora- 
tions had  been  organized  under  the  new  act;  that  the  statement  of 


FORMATION  OF  THE  BUSINESS  UNIT  347 

the  incorporation  in  each  case  was  made  upon  the  form  prescribed 
and  furnished  by  the  secretary  of  state  and  was  identical  with  the  form 
used  in  this  case,  and  that  the  incorporation  of  each  of  those  corpora- 
tions was  subject  to  the  same  infirmity  as  that  alleged  against  the 
appellees.  The  fees  paid  to  the  secretary  of  state  amounted  to  more 
than  $600,000  and  annual  franchise  taxes  to  a  large  amount  were 
about  to  fall  due  on  July  i.  Recognizing  the  public  inconvenience 
which  would  arise  from  a  prolonged  uncertainty  as  to  the  legality 
of  the  organization  of  these  corporations  we  announced  orally  our 
judgment  affirming  that  of  the  circuit  court,  stating  that  the  reasons 
would  be  given  in  an  opinion  to  be  filed  later. 

The  question  presented  was  whether  the  requirement  that  the 
incorporators  shall  seal  the  statement  is  mandatory  or  directory. 
It  was  argued  on  behalf  of  the  people  that  the  requirement  of  the 
seal  is  a  condition  precedent  to  the  legal  existence  of  a  corporation. 
A  somewhat  similar  question  arose  early  in  the  history  of  the  state 
in  the  case  of  Cross  v.  Pinckneyville  Mill  Co.  17  111.  54.  The  act  of 
1849  to  authorize  the  formation  of  corporations  for  manufacturing, 
agricultural,  mining,  or  mechanical  purposes  provided  that  any  three 
or  more  persons  desiring  to  form  a  company  for  such  purpose  should 
make,  sign,  and  acknowledge  arid  file  "in  the  office  of  the  clerk  in 
the  county  in  which  the  business  of  the  company  should  be  carried 
on  and  a  duplicate  thereof  in  the  office  of  the  Secretary  of  State,  a 
certificate  in  writing,"  in  which  should  be  stated  the  name  of  the  com- 
pany and  other  facts  mentioned  in  the  statute.  It  was  further 
provided  that  when  the  certificate  should  have  been  filed  as  aforesaid 
the  persons  who  should  have  signed  and  acknowledged,  and  their 
successors,  should  be  a  body  politic  and  corporate.  In  the  case 
mentioned  the  duplicate  certificate  of  organization  had  not  been 
filed  in  the  office  of  the  secretary  of  state,  but  the  court  held  that 
fact  unimportant  to  defeat  the  organization  or  rights  growing  out  of 
it;  that  there  is  a  well-settled  distinction  between  mandatory  and 
directory  provisions,  and  that  carrying  out  the  true  intention  of  the 
legislature  and  effectuating  the  object  of  the  law  would  not  be  pro- 
moted by  strict  technical  construction,  converting  every  direction 
and  detail  of  power  into  a  mandatory  prerequisite  of  corporate 
existence.  More  recently  a  question  arose  as  to  the  effect  of  the  failure 
to  mail  notices  of  the  meeting  of  subscribers  of  the  capital  stock  to 
elect  officers,  as  required  by  section  3  of  the  Corporation  Act  of  1872. 
We  said:  "The  statute  prescribes  a  certain  course  to  be  pursued  in 


348  LAW  AND  BUSINESS 

organizing  a  corporation  in  this  State.  It  does  not  necessarily 
follow,  however,  that  any  departure  from  that  course  will  prevent  a 
corporation  from  becoming  one  de  jure.  Whether  or  not  such  depar- 
ture will  have  that  effect  depends  upon  the  nature  of  the  provision 
which  is  violated.  If  it  is  a  mandatory  provision,  a  failure  to  sub- 
stantially comply  with  its  terms  will  prevent  the  corporation  from 
becoming  one  de  jure;  but  if  the  provision  is  merely  directory,  then 
a  departure  therefrom  will  not  have  that  consequence."  It  was 
held  that  it  was  immaterial  whether  or  not  notice  had  been  given  in 
the  manner  directed  by  the  statute,  the  persons  entitled  to  notice 
having  waived  it  and  actually  attended  the  meeting,  so  that  the 
purpose  of  the  statute  in  requiring  the  notices  to  be  given  was  accom- 
plished. (Butler  Paper  Co.  v.  Cleveland,  220  111.  128.)  The  court 
there  cited  the  case  of  Newcomb  v.  Reed,  12  Allen,  362,  in  which  the 
legality  of  a  corporation  was  questioned  where  the  call  for  the  first 
meeting  was  signed  by  only  one  of  the  persons  named  in  the  act  of 
incorporation  instead  of  a  majority,  as  required  by  the  statute  of 
Massachusetts,  and  it  was  held  that  "the  organization  was  not  strictly 
regular  but  can  hardly  be  considered  even  as  defective."  In  contrast 
with  this  case,  an  illustration  of  the  distinction  between  mandatory 
and  directory  provisions  is  furnished  by  another  case  in  the  same 
court  (Utley  v.  Union  Tool  Co.,  n  Gray,  139),  in  which  the  articles 
of  agreement  of  the  incorporators  did  not  fix  the  amount  of  the  capital 
stock  or  set  forth  distinctly  the  purpose  for  and  the  place  in  which 
the  corporation  was  establishd,  the  court  saying:  " There  is  an 
obvious  reason  for  making  such  an  organization  by  written  articles 
of  agreement  a  condition  precedent  to  the  exercise  of  corporate  rights. 
It  is  the  basis  on  which  all  subsequent  proceedings  are  to  rest  and  is 
designed  to  take  the  place  of  a  charter  or  act  of  incorporation,  by 
which  corporate  rights  and  privileges  are  usually  granted."  In 
Kwapil  v.  Bell  Tower  Co.,  55  Wash.  583,  it  was  held  that  where  a 
corporation  was  organized  pursuant  to  a  statute  except  that  it  did 
not  execute  its  articles  in  duplicate  and  retain  a  copy  in  its  office, 
there  was  a  substantial  compliance  with  the  law  so  as  to  make  it  a 
corporation  de  jure. 

The  requirement  of  a  seal  in  the  execution  of  documents  by 
individuals  has  become  a  mere  formality.  It  means  nothing.  Private 
seals  no  longer  exist  as  a  means  of  execution  of  specialties,  for  even 
an  individual  scrawl  is  not  required.  In  most  deeds  the  word  "seal" 
is  printed  on  the  blank  form  which  is  used  and  the  grantor  does  not 


FORMATION  OF  THE  BUSINESS  UNIT  349 

know  whether  he  has  used  a  seal  or  not.  It  depends  upon  whether 
the  word  was  printed  on  the  paper  or  not.  The  solemnity  of  the 
sealed  instrument  is  purely  Pickwickian  and  no  longer  represents  an 
idea.  While  courts  of  law  in  this  state  cannot  disregard  the  legal 
quality  of  the  sealed  instrument,  courts  of  equity  frequently  relieve 
parties  from  the  difficulties  arising  from  the  application  of  the  rigid 
rules  of  the  common  law  to  such  instruments.  We  may  look  to  the 
intention  of  the  statute  in  determining  the  effect  of  an  omission  to 
add  the  seal.  The  purpose  is  to  make  a  public  record  of  the  corpora- 
tion, the  definition  of  its  powers,  the  amount  of  its  stock,  the  names 
of  its  stockholders,  its  location,  and  other  facts,  in  connection  with 
it  which  are  of  interest  to  the  public  to  know  and  of  the  state  in  its 
supervision  over  corporations  to  be  acquainted  with.  The  addition  of  a 
seal  is  of  no  importance  for  these  purposes.  It  is  not  of  the  essence 
of  the  thing  to  be  done  and  no  prejudice  can  result  from  its  omission. 
The  essential  act  of  making  the  statement,  though  not  in  the  precise 
manner  indicated,  accomplishes  the  substantial  purpose  of  the 
statute,  and  that  is  sufficient.  It  would  not  be  carrying  out  the 
intention  of  the  legislature  to  hold  that  the  addition  of  a  scrawl  by 
the  signers  of  the  statement  is  mandatory  and  its  omission  invalidates 
the  incorporation. 

For  these  reasons  the  judgment  of  the  circuit  court  was  affirmed. 

Judgment  affirmed. 


QUESTIONS 

1.  Trace  the  necessary  steps  in  the  organization  of  a  corporation  under 
the  act  referred  to  in  the  principal  case. 

2.  At  what  moment  does  a  corporation  come  into  existence  under  this 
act? 

3.  Why  does  this  act  exclude  from  its  provision  certain  corporations? 
Do  you  infer  from  this  exclusion  that  such'  corporations  cannot  be 
organized  ? 

4.  What  is  the  general  purpose  of  the  requirements  outlined  in  this  act 
for  the  organization  of  a  corporation  ? 

5.  What  does  the  court  mean  in  the  principal  case  by  mandatory  provisions  ? 
by  directory  provisions  ?    What  is  the  effect  of  a  failure  of  the  incorpo- 
rators   to   comply  with   directory  provisions?   with   mandatory   pro- 
visions ? 

6.  What  is  meant  by  a  dejure  corporation?    What  are  the  essential  require- 
ments of  a  de  jure  corporation  ? 


350  LAW  AND  BUSINESS 

SOCIETY  PERUN  v.  CITY  OF  CLEVELAND 
43  Ohio  State  Reports  481  (1885) 

On  January  28,  1874,  the  city  of  Cleveland  conveyed  to  Perun 
(an  incorporated  school  and  literary  society)  certain  real  estate 
situated  in  that  city,  and  to  secure  the  unpaid  purchase  money 
therefor,  Perun,  on  the  same  date,  executed  and  delivered  to  the 
city  its  four  promissory  notes  and  a  mortgage  upon  the  premises 
conveyed.  The  city  neglected  to  file  this  mortgage  for  record  until 
October  21,  1879.  In  February,  1874,  certain  persons  attempted  to 
organize  a  mutual  benefit  association,  under  an  act  supplementary 
to  an  act  to  provide  for  the  creation  and  regulation  of  incorporated 
companies,  passed  May  i,  1852  (Swan  &  Co.  St.  271),  passed  April 
20,  1872  (69  Ohio  Laws  82),  under  the  corporate  name  of  "  Society 
Perun."  Thereafter,  in  May,  1874,  Perun  delivered  to  Society  Perun 
its  deed  purporting  to  convey  to  the  latter  the  premises  theretofore 
mortgaged  to  the  city.  From  that  time  forward  and  prior  to  the 
filing  of  the  city's  mortgage  for  record,  Society  Perun,  acting  in  its 
supposed  corporate  capacity,  from  time  to  time  executed  and  delivered 
deeds,  mortgages,  and  executory  contracts  of  sale,  purporting  to 
convey,  incumber,  and  sell  parcels  of  these  mortgaged  premises  to 
various  parties,  who  were  made  defendants  in  the  action  below, 
and  some  of  whom  (including  Amasa  Stone,  a  mortgagee,  and  who  had 
paid  taxes  upon  the  premises  mortgaged  to  him)  are  cross-petitioners 
in  error. 

Thereafter,  in  June,  1880,  in  a  proceeding  in  quo  warranto  in 
this  court,  instituted  by  the  attorney-general,  Society  Perun  was 
adjudged  not  to  have  become  incorporated  in  comformity  to  the 
laws  of  this  state,  but  that  its  pretended  incorporation  was  in  violation 
thereof;  and  it  was  accordingly  ousted  of  all  rights  and  franchises 
to  be  a  corporation.  These  proceedings  in  quo  warranto  were  had 
pending  and  prior  to  the  final  judgment  in,  the  action  below;  which 
was  bought  by  the  city  to  foreclose  her  mortgage,  and  also  to  foreclose 
her  supposed  vendor's  lien  on  the  mortgaged  premises,  as  against 
these  subsequent  grantees,  mortgages,  and  purchasers.  The  cause 
was  appealed  from  the  court  of  common  pleas  to  the  district  court, 
wherein  it  was  tried  upon  the  issues,  the  court  finding,  among  other 
things,  that,  as  to  the  city  of  Cleveland,  Society  Perun  was  not  a 
corporation  either  in  law  or  in  fact,  and  that  the  conveyance  to  it 
by  Perun  was  void  as  against  the  city;  and  that  the  mortgages  and 
other  liens  and  claims  of  all  the  defendants  (except  the  lien  of  Amasa 


FORMATION  OF  THE  BUSINESS  UNIT  351 

Stone  for  taxes  and  the  claims  of  certain  defendants  for  improvements 
on  the  premises)  were  subsequent  and  inferior  to  the  lien  of  the  city, 
in  whose  favor  the  court  adjudged  the  second  lien,  and  subsequent 
only  to  the  lien  of  Amasa  Stone  for  taxes  paid  by  him,  but  of  equal 
rank  and  merit  with  the  holders  of  liens  for  expenditures  on  account 
of  improvements  above  mentioned. 

By  the  judgment  in  the  quo  warranto  proceeding  it  was  by  this 
court  in  form  adjudged  that  the  defendants  (the  pretended  incorpo- 
rators),  ever  since  their  pretended  incorporation,  had  unlawfully  and 
without  authority  exercised  the  franchise  of,  and  usurped  the  right 
to  be,  a  body  corporate;  that  the  pretended  organization  of  these 
defendants  as  a  corporation  was  wholly  void  and  of  no  effect,  and 
vested  in  them  no  corporate  rights,  powers,  privileges,  or  franchises 
of  any  description  whatever.  The  sole  ground  upon  which  this 
judgment  of  ouster  was  rendered,  was  that  while  the  statute  requires 
that  they  should  set  forth  in  their  certificate  of  incorporation  (among 
other  things)  the  manner  of  carrying  on  the  business  of  the  association, 
the  attempted  compliance  with  this  requirement  was  in  these  words: 
"  Third.  That  the  manner  of  carrying  on  the  business  of  said  associa- 
tion shall  be  such  as  may  be  from  time  to  time  prescribed  by  the  by- 
laws of  such  association:  provided,  that  the  same  shall  not  be  incon- 
sistent with  the  laws  of  the  state  of  Ohio." 

Upon  the  trial  below  the  plaintiff  gave  in  evidence,  against  the 
objection  of  defendants,  the  record  of  the  quo  warranto  proceedings. 
The  defendants  offered  in  evidence  the  writing  which  was  filed  with 
the  secretary  of  state  as  the  certificate  of  incorporation  of  Society 
Perun.  They  also  offered  to  prove  that  the  pretended  incorporators 
proceeded  to  comply  strictly  with  requirements  of  the  statutes; 
that  the  elected  trustee  prepared  a  certificate  of  incorporation  stating 
explicitly  the  manner  of  carrying  on  the  business;  that  this  was 
forwarded  to  the  secretary  of  state,  who  submitted  it  to  the  attorney- 
general  for  examination  and  approval;  that  the  secretary  of  state 
returned  this  paper  with  another  form  of  certificate,  which  had  been 
approved  by  the  attorney-general  and  secretary  of  state,  and  which 
was  the  identical  certificate  actually  filed  with  the  secretary  of  state, 
and  under  the  supposed  authority  of  which  an  organization  was  in 
good  faith  attempted,  and  that  they  proceeded  in  good  faith  to  act 
and  transact  its  business  under  the  supposed  authority  of  such 
incorporation.  All  this  was  excluded,  and  the  defendants  excepted. 
To  reverse  this  judgment  the  present  proceeding  is  prosecuted. 


3$2  LAW  AND  BUSINESS 

The  alleged  errors  chiefly  relied  upon  are  the  exclusion  of  the 
evidence  offered  to  prove  an  attempt,  in  good  faith,  to  incorporate 
Society  Perun;  the  finding  and  holding  of  the  court  that  Society 
Perun  had  never  been,  in  law  or  fact,  a  corporation;  that  as  against 
the  city  the  deed  from  Perun  was  void;  and  adjudging  the  city's 
lien  to  be  prior  to  the  rights  and  liens  of  Society  Perun  and  its 
mortgagees,  grantees,  and  purchasers. 

OWEN,  J.  The  defendants  below,  conceding  that  Society  Perun 
had  never  been  a  corporation  de  jure,  maintain  that  the  court  below 
should  have  permitted  them  to  prove  that  such  society  was  a  de  facto 
corporation;  that  it  attempted  in  good  faith  to  become  a  body 
corporate;  proceeded  to  act  and  transact  business  in  good  faith  under 
the  supposed  authority  of  incorporation;  and  that  its  acts  ought  not 
to  have  been  declared  to  be  wholly  void  as  against  the  city  of  Cleveland. 
The  judgment  of  ouster  was  an  adjudication  between  the  state  and 
the  society  upon  the  right  of  the  latter  to  exercise  corporate  franchises. 
For  the  purposes  of  such  adjudication,  it  was  competent  for  this  court 
to  consider  and  determine  what  had  been  its  status  from  its  first 
attempt  to  incorporate.  But  it  had  no  power  to  pass  upon  or  deter- 
mine the  rights  of  parties  not  before  it.  It  was  not  competent  for 
this  court  to  determine  in  that  proceeding  that  Society  Perun  had 
never  been  a  corporation  de  facto,  or  that  its  acts  and  business 
transactions,  under  the  color  of  its  supposed  charter  powers,  were 
void.  The  authority  of  the  court  in  that  behalf  was  derived  from 
section  5774,  Rev.  St.,  which  provides:  "When  a  defendant  is  found 
guilty  of  usurping,  intruding  into,  or  unlawfully  holding  or  exercising 
an  office,  franchise,  or  privilege,  judgment  shall  be  rendered  that 
such  defendant  be  ousted  and  altogether  excluded  therefrom,  and  that 
the  relator  recover  his  costs." 

When  the  court  had  excluded  the  society  from  its  franchises  to 
be  a  corporation,  it  exhausted  its  jurisdiction  over  the  subject-matter. 
It  had  no  power  to  speak  concerning  whatever  rights  may  have  been 
acquired  by  the  society  as  a  corporation  de  facto,  or  by  third  parties 
in  their  transactions  with  it  as  an  acting  corporation. 

It  is  conceded  by  the  city  that  parties  who  had  recognized  the 
existence  of  the  society  by  their  transactions  with  it  as  a  supposed 
corporation  are  estopped  to  deny  its  corporate  existence.  But  it  is 
maintained  that  the  city,  having  engaged  in  no  transactions  with  it, 
is  free  to  challenge  its  existence  as  a  corporation,  de  facto  as  well 
as  de  jure.  The  argument  is  that  "no  case  can  be  found  where  it  is 


FORMATION  OF  THE  BUSINESS  UNIT  353 

held  that  there  is  a  corporation  de  facto  against  persons  who  have  in 
no  way  recognized  its  existence  as  a  corporation";  and  that  "the 
notion  of  a  de  facto  corporation  is  based  on  the  doctrine  of  estoppel; 
when  estoppel  cannot  be  invoked,  there  can  be  no  de  facto  corporation." 
The  theory  that  a  de  facto  corporation  has  no  real  existence,  that  it 
is  a  mere  phantom,  to  be  invoked  only  by  that  rule  of  estoppel  which 
forbids  a  party  who  has  dealt  with  a  pretended  corporation  to  deny  its 
corporate  existence,  has  no  foundation,  either  in  reason  or  authority. 

A  de  facto  corporation  is  a  reality.  It  has  an  actual  and  sub- 
stantial legal  existence.  It  is,  as  the  term  implies,  a  corporation. 
"It  is  a  self-evident  proposition  that  a  contract  cannot  be  made 
with  a  corporation  unless  the  corporation  be  in  existence  at  the  time. 
A  real  contract  with  an  imaginary  corporation  is  as  impossible,  in 
the  nature  of  things,  as  a  real  contract  with  an  imaginary  person. 
It  is  essential,  therefore,  in  order  to  'establish  the  existence  of  a 
contract  with  a  corporation,  to  show  that  the  corporation  was  in 
existence,  at  least  de  facto,  at  the  time  the  contract  was  made.1' 
Mor.,  Priv.  Corp.  section  137.  It  is  bound  by  all  such  acts  as  it  might 
rightfully  perform  as  a  corporation  de  jure.  Where  it  has  attempted, 
in  good  faith,  to  assume  corporate  powers;  where  its  proceedings  in 
that  behalf  are  colorable,  and  are  approved  by  those  officers  of  the 
state  who  are  authorized  to  act  in  that  regard;  where  it  has  honestly 
proceeded  for  a  number  of  years,  without  interference  from  the 
state,  to  transact  business  as  a  corporation;  has  been  reputed  and 
dealt  with  as  a  duly  incorporated  body,  and  valuable  rights  and 
interests  have  been  acquired  and  transferred  by  it — no  substantial 
reason  is  suggested  why  its  corporate  existence,  in  a  suit  involving 
such  transactions,  should  be  subject  to  attack  by  any  other  party 
than  the  state,  and  then  only  when  it  is  called  upon,  in  a  direct 
proceeding  for  that  purpose,  to  show  by  what  authority  it  assumes 
to  be  a  corporation. 

Did  the  court  err  ?  This  fairly  presents  the  controlling  and  very 
important  question:  Was  it  competent  to  show,  as  against  a  party 
who  has  not  estopped  to  deny  its  corporate  existence,  that  Society 
Perun  was,  at  the  time  of  the  transactions  involved  in  controversy, 
a  corporation  de  facto?  In  Attorney-General  v.  Stevens,  i  N.J.  Eq. 
369,  the  relator  sought  to  enjoin  the  Camden  &  Amboy  Railroad 
&  Transportation  Co.,  and  others  acting  under  its  authority,  from 
erecting  a  bridge  over  a  navigable  stream.  The  claim  was  that  the 
act  authorizing  the  corporation  had  been  perverted  and  disregarded, 


354  LAW  AND  BUSINESS 

and  that  there  was  no  legal  incorporation.  The  relators  were  in  no 
manner  estopped  from  attacking  the  corporate  existence  of  the 
respondent.  The  court  held:  "  Where  a  set  of  men  claiming  to  be 
a  legally  incorporated  company,  under  an  act  of  the  legislature, 
have  done  everything  necessary  to  constitute  them  a  corporation, 
colorably,  at  least,  if  not  legally,  and  are  exercising  all  the  powers  and 
functions  of  a  corporation,  they  are  a  corporation  de  facto,  if  not 
de  jure;  and  this  court  will  not  interfere,  in  an  incidental  way,  to 
declare  all  their  proceedings  void  and  treat  them  as  a  body  having 
no  rights  or  powers." 

The  chancellor,  speaking  for  the  court,  said : 

Here,  then,  is  a  set  of  men,  claiming  to  be  a  legally  incorporated  com- 
pany, under  the  act  of  the  legislature,  exercising  all  the  powers  and  functions 
of  a  corporation.  They  are  a  corporation  de  facto,  if  not  de  jure.  Every- 
thing necessary  to  constitute  them  a  corporation  has  been  done,  colorably, 
at  least,  if  not  legally;  and  I  do  not  feel  at  liberty,  in  this  incidental  way, 
to  declare  all  their  proceedings  void,  and  treat  them  as  a  body  having  no 
rights  or  powers.  It  has  been  seen  that  the  court  will  not  do  this  where 
a  corporation  properly  organized  has  plainly  forfeited  its  privileges;  and 
there  is  but  little  difference  in  principle  between  the  two  cases.  In  both, 
the  corporation  is  actually  in  existence,  but  whether  legally  and  rightfully 
so  is  the  question.  And  it  appears  to  me  that  if  the  court  can  take  cogni- 
zance of  the  matter  in  this  case,  it  must  in  all  others  where  it  can  be  brought 
up  not  only  directly  but  incidentally. 

In  Thompson  v.  Candor,  60  111.  244,  Willets,  in  February,  1858, 
deeded  to  "Mercer  Collegiate  Institute,"  a  body  pretending ^to  be  a 
corporation,  the  tract  of  land  in  controversy.  He  died  in  March, 
1858.  In  1868  his  heirs  quitclaimed  their  interest  in  the  land  to 
Thompson,  who  filed  a  bill  in  chancery  for.  the  cancellation  of  the  deed 
from  Willett  to  the  "Institute,"  alleging  as  one  of  the  grounds  of 
relief  that  the  named  grantee  was  not  legally  incorporated,  had  no 
capacity  to  take  title,  and  that  the  deed  was  void.  The  court  held: 

Where  parties  endeavored  to  organize  a  corporation  for  educational 
purposes,  under  the  general  law,  adopt  a  name,  elect  trustees,  and  organize 
by  electing  a  president  and  officers,  and  the  trustees  had  acted  for  years 
in  managing  the  property,  had  leased  and  mortgaged  it,  and  expended  a 
large  sum  of  money  in  its  improvement,  these  acts  constitute  it  a  corporate 
body  de  facto,  and  the  regularity  of  its  organization  cannot  be  questioned 
collaterally.  Such  irregularity  can  only  be  questioned  by  quo  warranto 
or  scire  facias. 


FORMATION  OF  THE  BUSINESS  UNIT  355 

THORNTON,  J.,  says: 

In  1856  an  attempt  was  made  to  organize  a  corporation  under  the 
general  incorporation  law.  A  corporate  name  was  selected,  trustees  were 
appointed,  and  an  organization  effected  by  the  election  of  a  president  and 
proper  officers.  The  trustees  thus  appointed  acted  for  years  in  the  general 
management  of  the  property,  leased  and  mortgaged  it,  and  expended  a  large 
amount  of  money.  Here,  then,  was  a  corporate  body  de  facto  which  had 
been  engaged  in  an  undertaking  involving  important  interests.  The  regu- 
larity of  its  organization  cannot  be  questioned  collaterally.  An  alleged 
non-compliance  with  the  law  can  only  be  inquired  into  by  the  writ  of  quo 
warranto  or  scire  facias. 

There  is  no  suggestion  throughout  the  entire  case  of  the  rule  of 
estoppel  as  an  element  affecting  its  disposition.  In  Persse  v.  Willett, 

1  Robt.  (N.Y.)  131,  it  is  held  that  formal  defects  in  proceedings  to 
organize  a  corporation  are  not  available  to  defeat  an  action  brought 
by  a  corporation  for  trespass  in  wrongfully  taking  property  out  of  its 
possession.     See  also,  as  illustrating  the  principle  under  discussion: 
Smith  v.  Sheeley,  12  Wall.  361,  20  L.  Ed.  430;   Grand  Gulf  Bank  v. 
Archer,  8  Smedes  &  M.  (Miss.)  151,  173;   Dunning  v.  Railroad  Co. 

2  Ind.  438;  Dannebroge  Min.  Co.  v.  Ailment,  26  Cal.  286;  Searsburgh 
Turnpike  Co.  v.  Cutler,  6  Vt.  315;    Mitchell  v.  Deeds,  49  111.  416; 
Elizabeth  City  Academy  v.  Lindsey,  28  N.C.  476,  45  Am.  Dec.  500; 
Darst  v.  Gale,  83  111.  136;   Rondell  v.  Fay,  32  Cal.  354;   Dewitt  v. 
Hastings,  40  N.Y.  Super.  Ct.  463;   Rice  v.  Railroad  Co.  21  111.  93; 
Commissioners  v.  Bolles,  94  U.S.  104,  24  L.  Ed.  46;  Banks  v.  Poitiaux, 
24  Va.  136,  15  Am.  Dec.  706;  Goundie  v.  Water  Co.  7  Pa.  233;  Baker 
v.  Backus,  32  111.  79;    Tarbell  v.  Page,  24  111.  46;    Thornburgh  v. 
Railroad  Co.,  14  Ind.  499;   Tar  River  Nav.  Co.  v.  Neal,  10  N.C.  520,; 
Bear  Camp  River  Co.  v.  Woodman,  2  Greenl.  (Me.)  404. 

In  Jones  v.  Dana,  24  Barb.  (N.Y.)  395,  it  was  held  that  if  a  com- 
pany has  in  form  a  charter  authorizing  it  to  act  as  a  body  corporate, 
and  is  in  fact  in  the  exercise  of  corporate  powers  at  the  time  of  taking 
a  note  from  an  individual,  it  is,  as  to  him  and  all  third  persons,  a 
corporation  de  facto,  and  the  validity  of  its  corporate  existence  can 
only  be  tested  by  proceedings  in  behalf  of  the  people. 

In  the  case  at  bar,  the  certificate  which  was  last  filed  by  the 
society  embraced  a  full  statement  of  the  objects  of  incorporation 
and  indicated  what  the  nature  of  its  business  must  necessarily  be, 
and  was  strongly  suggestive  of  the  manner  in  which  it  must  necessarily 
be  transacted;  and  while  it  is  not  our  purpose  to  call  in  question  the 


356  LAW  AND  BUSINESS 

action  of  this  court  in  the  quo  warranto  proceedings,  we  have  no 
hesitation  in  saying  that  if  we  were  now  called  upon  to  determine 
whether  the  corporate  life  of  Society  Perun  should  be  taken,  the 
question,  upon  the  facts  offered  in  proof,  would  not  be  free  from 
doubt  and  difficulty.  It  is  very  clear  that  the  proceedings  to  incorpo- 
rate were  colorable;  and  so  far  as  this  fact  is  a  test  of  the  existence 
of  a  corporation  de  facto,  it  is  most  amply  established.  That  there 
was  proof  of  user  is  manifest  from  the  evidence,  which  was  received 
without  objection.  That  the  judgment  of  ouster  did  not  and  could 
not  have  a  retroactive  effect  upon  the  rights  of  the  society,  and  of  the 
parties  who  had  dealt  with  it  during  its  de  facto  existence,  is  suggested 
by  the  opinion  of  WRIGHT,  J.,  in  Gajff  v.  Flesher,  33  Ohio  St.  115. 
The  evidence  which  was  offered  and  excluded  would,  if  credited, 
have  shown  Society  Perun  capable  of  holding  and  transferring  the 
legal  title  to  the  lands  in  controversy.  Walsh  v.  Barton,  24  Ohio  St. 
43;  Darst  v.  Gale,  83  111.  136;  Shewalter  v.  Pirner,  55  Mo.  218; 
National  Bank  v.  Matthews,  98  U.S.  628,  25  L.  Ed.  188;  Goundie  v. 
Water  Co.,  7  Pa.  233;  Barrow  v.  Nashville,  etc.  Co.,  9  Humph.  (Tenn.) 
304;  Kelly  v.  People's  Transp.  Co.,  3  Or.  189;  Bogardus  v.  Trinity 
Church,  4  Sandf.  Ch.  (N.Y.)  758. 

The  public  and  all  persons  dealing  with  the  society  were  justified 
in  assuming  that  the  certificate  filed  with  the  secretary  of  state,  and 
by  him  admitted  to  record  in  his  office,  had  been  approved  by  him 
and  also  by  the  attorney-general,  as  required  by  statute  (69  Ohio  Laws, 
150),  and  that  it  so  far  conformed  to  all  legal  requirements  that, 
as  provided  in  section  2  of  the  act  of  incorporation  (69  Ohio  Laws,  80), 
"a  copy  duly  certified  by  the  secretary  of  state,  under  the  great  seal 
of  the  state  of  Ohio,  shall  be  evidence  of  the  existence  of  such  associa- 
tion." It  would  seem  that  such  approval,  record  and  certificate, 
followed  by  uninterrupted  and  unchallenged  user  for  nearly  six  years, 
of  all  of  which  proof  was  tendered,  would  constitute  a  corporation 
de  facto,  if  such  a  body  is,  under  any  circumstances,  entitled  to  legal 
recognition.  The  highest  considerations  of  public  policy  and  fair 
dealing  protest  against  treating  such  an  organization  as  a  nullity 
and  all  of  its  transactions  void. 

The  principle  of  these  cases  is  to  be  distinguished  from  a  case 
where  a  mere  corporation  de  facto  attempts  to  assert  the  power  of 
eminent  domain  by  the  appropriation  of  private  property  to  public 
use.  It  has  been  held  that  the  exercise  of  this  right  (which  is  but  a 
delegation  of  the  sovereign  power  of  the  state)  depends  upon  the 


FORMATION  OF  THE  BUSINESS  UNIT  357 

sufficiency  and  legal  validity  of  the  certificate  of  incorporation  and 
public  record  of  its  organization.  Railroad  Co.  v.  Sullivant,  5  Ohio 
St.  276;  Atkinson  v.  Railroad  Co.  15  Ohio  St.  21.  The  case  of 
Raccoon  River  Nav.  Co.  v.  Eagle,  29  Ohio  St.  238,  is  relied  upon  by  the 
defendant  in  error.  It  was  an  action  to  recover  upon  a  stock  subscrip- 
tion. A  plea  of  nul  tiel  corporation  was  interposed.  The  plaintiff 
claimed  to  be  organized  under  an  act  to  authorize  the  incorporation 
of  companies  "for  the  purpose  of  improving  any  stream  of  water 
declared  navigable  by  any  law  of  the  state  of  Ohio."  On  the  trial 
the  plaintiff  offered  in  evidence  a  certificate  by  which  it  appeared 
that  the  company  was  formed  for  the  purpose  of  improving,  etc., 
Big  Raccoon  River.  Unfortunately,  there  was  no  navigable  stream  in 
Ohio  by  that  name.  No  other  testimony  was  offered.  There  was 
no  proof  of  user.  There  was  no  defect  in  the  form  of  the  proceedings 
to  incorporate,  but  an  attempt  to  organize  and  incorporate  for  a 
purpose  impossible  of  accomplishment.  There  was  neither  a  de  jure 
nor  de  facto  corporation.  Judgment  was  properly  rendered  for 
defendant. 

In  excluding  proof  of  what  was  actually  done,  looking  to  the 
incorporation  of  Society  Perun,  and  of  the  subsequent  acts  of  user, 
which  was  offered  in  evidence,  there  was  error,  for  which  the  judgment 
in  the  first  entitled  case  (as  well  as  that  in  the  Same  Plaintiff  v.  Hay 
and  others,  which  was  tried  with  it,  and  involves  the  same  general 
questions)  is  reversed.  Numerous  other  questions  are  presented  by 
the  voluminous  records  in  these  cases,  but  as  they  all  depend  upon  the 
one  central  and  controlling  question  discussed  above,  and  as  the 
disposition  here  made  of  the  cases  must  lead  to  a  retrial  in  the  light  of 
the  principles  indicated  in  this  opinion,  they  are  not  separately 
considered. 

Judgment  reversed. 

QUESTIONS 

1.  What  is  a  de  facto  corporation?    What  are  the  essential  requirements 
for  the  existence  of  a  de  facto  corporation  ? 

2.  In  what  respect  did  Society  Perun  fail  to  comply  with  the  law  so  that  it 
never  became  a  corporation  de  jure  ? 

3.  A,  B,  and  others  organized  under  a  general  incorporating  law  and  transac- 
ted business  as  a  corporation  for  three  years.    In  the  meantime  the  law 
under  which  it  was  organized  was  declared  unconstitutional.     C  sues 
A,  B,  and  the  others  as  partners  on  a  note  purporting  to  have  been 
executed  by  the  corporation.    What  decision  ? 


358  LAW  AND  BUSINESS 

4.  It  was  contended  in  this  case  that  the  city  of  Cleveland  was  in  a  position 
to  challenge  the  existence  of  Society  Perun  because  it  had  never  dealt 
with  it  as  a  corporation.     On  what  theory  was  this  contention  made  ? 

5.  "The  existence  of  a  de  facto  corporation  cannot  be  called  into  question 
in  collateral  proceedings."    What  is  meant  by  this  statement?    How 
then  can  the  existence  of  such  a  corporation  be  challenged  ? 

6.  What  are  the  powers  of  a  de  facto  corporation  ? 

7.  What  justification  is  there  for  the  recognition  of  a  de  facto  corporation? 

BERGERON  v.  HOBBS 

96  Wisconsin  Reports  641  (1897) 

The  defendants,  under  the  name  of  Bayfield  County  Agricultural 
Association,  employed  several  persons  to  perform  labor  in  improving 
their  grounds  and  in  erecting  fences  and  buildings.  Time  checks 
given  by  the  defendants  to  such  laborers,  for  such  labor,  were  assigned 
to  the  plaintiff,  who  brings  this  action  to  recover  their  amount,  alleging 
that  the  defendants  were  a  copartnership.  The  defendants  alleged 
that  they  were  members  of  a  corporation,  and  denied  that  they 
were  copartners,  or  liable  as  such.  This  was  the  issue  which  was  tried. 
It  appeared  upon  the  trial  that  articles  of  organization  of  the  defend- 
ants as  the  Bayfield  County  Agricultural  Association,  and  a  certifi- 
cate showing  the  election  of  officers,  had  been  recorded  in  the  office 
of  the  register  of  deeds  of  Bayfield,  but  were  not  on  file  there.  They 
had  been  deposited  with  instructions  to  record  and  return  them  which 
had  been  complied  with.  When  the  testimony  of  both  sides  was 
in,  the  court  directed  a  verdict  for  the  plaintiff  for  the  amount  of  the 
time  checks.  From  a  judgment  on  that  verdict  the  defendants 
appeal. 

NEWMAN,  J.  There  are  two  questions  raised  on  this  appeal: 
(i)  Was  the  mere  recording  of  the  articles  of  incorporation,  with  the 
certificate  of  the  election  of  officers,  without  the  intention  or  fact  of 
the  papers  themselves  remaining  in  the  office,  a  sufficient  compliance 
with  the  statute,  so  that  the  organization  of  the  corporation  became 
complete,  as  upon  a  proper  filing  of  the  papers  themselves  ?  and  (2) 
if  the  recording  was  not  sufficient  for  that  purpose,  are  the  defendants 
liable  to  the  plaintiff  only  as  a  de  facto  corporation,  or  are  they 
liable  as  copartners  ? 

i.  The  statute  (sec.  1460,  Rev.  St.)  provides  that,  upon  the  filing 
of  "a  certificate  of  organization,  with  a  copy  of  the  constitution,  in 
the  office  of  the  register  of  deeds  of  the  county,  such  society  shall  have 


FORMATION  OF  THE  BUSINESS  UNIT  359 

all  the  powers  of  a  corporation,  necessary  to  promote  the  objects 
thereof."  It  cannot  be  doubted  that  the  filing  of  the  proper  papers 
in  the  proper  office  is  made,  by  the  statute,  a  condition  precedent  to 
the  vesting  of  corporate  powers.  The  court  may  not  be  able  to  define 
clearly  the  respect  wherein  the  mere  recording  and  removal  of  tne 
papers  from  the  office  fails  to  serve  the  full  purpose  which  the  legis- 
lature intended  to  accomplish  by  the  filing  of  them.  The  legislature, 
no  doubt,  had  good  and  sufficient  reasons  for  its  choice  of  means  to 
promote  its  purpose.  For  the  court  it  is  not  a  question  of  equivalents. 
A  literal  filing  of  the  papers  is  necessary  because  it  is  so  written  in 
the  law.  The  term  " filing"  and  the  verb  "to  file,"  as  related  to 
this  subject,  include  the  idea  that  the  paper  is  to  remain  in  its  proper 
order  on  file  in  the  office.  A  paper  is  said  to  be  filed  when  it  is  delivered 
to  the  proper  officer,  and  by  him  received,  to  be  kept  on  file.  Bouv. 
Law  Diet.  The  statute  is  plain  and  easy  of  observance.  Valuable 
rights  and  exemption  from  personal  liability  are  to  be  secured  by  its 
observance.  It  is  no  undue  seventy  to  require  its  strict  observance. 
The  defendants  had  not  observed  it,  and  had  not  secured  corporate 
powers. 

2.  Had  the  defendants  secured  immunity  from  individual  lia- 
bility? No  doubt,  as  a  general  rule,  where  an  attempt  to  organize 
a  corporation  fails,  by  omission  of  some  substantial  step  or  proceeding 
required  by  the  statute,  its  members  or  stockholders  are  liable  as 
partners  for  its  acts  and  contracts.  Beach,  Private  Corporations, 
sections  16,  1626;  Thompson,  Corporations,  sections  239,  416,  417. 
But  the  defendants'  contention  is  that  they  are  not  within  this  rule, 
because  they  are,  at  least  de  facto,  a  corporation,  and  their  right  to 
be  a  corporation  cannot  be  inquired  into  in  a  collateral  action,  but 
only  in  a  direct  action  for  that  purpose  by  the  state.  The  infirmity 
of  the  defendants'  contention  is  in  the  assumption  that  they  are  a 
de  facto  corporation.  In  order  to  secure  this  immunity  from  inquiry 
into  its  right  to  be  a  corporation  in  a  collateral  action,  its  action, 
as  a  corporation,  must  be  under  a  color,  at  least,  of  right.  It  is 
immaterial  that  they  have  carried  on  business  under  the  supposed 
authority  to  act  as  a  body  corporate,  in  entire  good  faith.  If  they 
had  not  color  of  legal  right,  they  have  obtained  no  immunity  from 
individual  liability  for  the  debts  of  the  supposed  corporation.  Until 
the  articles  of  incorporation  are  filed  in  the  office  of  the  register  of  deeds 
of  the  county,  there  is  no  color  of  legal  right  to  act  as  a  corporation. 
The  filing  of  such  paper  is  a  condition  precedent  to  the  right  to  so  act. 


360  LAW  AND  BUSINESS 

So  long  as  an  act,  required  as  a  condition  precedent,  remains  undone, 
no  immunity  from  individual  liability  is  secured,  i  Thompson, 
Corporations,  sections  226,  508. 

The  defendants  are  not  a  corporation  either  de  jure  or  de  facto, 
but  are  liable  for  the  plaintiff's  claim,  as  partners.  It  was  not  neces- 
sary to  prove  a  copartnership  by  evidence.  That  was  established 
by  implication  of  law.  Nor  was  it  necessary  to  prove  that  the  debt 
was  unpaid.  There  was  no  presumption  that  it  had  been  paid  to  be 
rebutted.  The  judgment  of  the  circuit  court  is  right,  and  must  be 
affirmed.  The  judgment  of  the  circuit  court  is  affirmed. 

MARSHALL,  J.  (Dissenting.)  With  the  decision  that  the  defend- 
ants failed  to  comply  with  all  the  conditions  precedent  to  the  corpo- 
rate existence  of  the  agricultural  association  I  concur,  but  from  the 
decision  that  because  of  such  failure  such  association  was  not  a 
corporation  de  facto  I  respectfully  dissent,  hence  dissent  from  the 
conclusion  reached  that  the  defendants  are  personally  liable  to 
plaintiff,  and  that  the  judgment  should  be  affirmed,  but,  on  the 
contrary,  hold  that  it  should  be  reversed. 

My  brethren  cite  Beach,  Priv.  Corp.,  section  162^,  and  i  Thompson, 
Corp.,  sections  239, 508,  to  the  effect  that,  unless  all  the  conditions  prece- 
dent to  the  creation  of  a  corporation  are  performed,  there  can  be  no 
corporation  in  fact,  and  that  the  members  of  the  pretended  corporation 
will  be  personally  liable.  Then  sections  417  and  420  of  Judge  Thomp- 
son's work  are  cited,  to  the  effect  that,  if  the  corporation  never  comes 
into  being  in  fact,  so  as  to  be  regarded  as  a  corporation  de  facto,  the 
persons  who  have  assumed  to  contract  in  its  name  are  personally 
liable.  These  sections  seem  to  be  tied  together,  in  the  opinion  of 
the  court,  as  if  the  two  ideas  are  in  harmony,  when  the  contrary, 
to  my  mind,  is  manifestly  true. 

Thompson  treats  this  subject  in  such  a  way  as  to  naturally 
confuse  one  who  attempts  to  follow  him  as  authority.  After  saying, 
in  sections  239,  508,  in  effect,  that  all  the  conditions  precedent  to 
the  creation  of  a  corporation  must  be  complied  with,  in  order  that  the 
members  may  escape  personal  liability,  he  says,  in  section  417,  that 
the  rule  does  not  apply  to  corporations  de  facto,  and  in  section  420, 
that  where  there  is  a  corporation  de  facto — in  other  words,  where 
the  circumstances  are  such  that  a  corporation  might  exist,  and  where 
the  party  seeking  to  charge  the  member  individually  has  dealt  with 
them  as  a  corporation — he  is  estopped  from  setting  up  the  fact  that 
they  are  not  a  corporation  dejure,  in  order  to  charge  them  personally . 


FORMATION  OF  THE  BUSINESS  UNIT  361 

From  this  confusion  it  is  not  to  be  wondered  at  that  if  a  person  tries 
to  follow  Judge  Thompson  he  will  be  led  inevitably  into  the  position 
of  holding  that,  unless  all  the  conditions  precedent  to  the  existence 
of  a  corporation  are  complied  with,  personal  liability  of  the  members 
of  the  corporation  will  exist,  though  the  rule  does  not  apply  if  the 
organization  be  a  corporation  de  facto.  That  comes  from  trying  to 
harmonize  conflicting  decisions,  that  proceed  on  theories  so  opposite 
that  harmony  is  impossible. 

If  we  hold  with  Missouri,  Arkansas,  and  some  other  states,  that 
unless  all  the  steps  necessary  to  the  creation  of  the  corporation  have 
been  taken  there  is  no  corporate  existence,  and  that  the  members  of 
the  association  are  personally  liable,  we,  in  effect,  say  that  it  is  not 
sufficient  to  enable  such  members  to  escape  personal  liability  to  show 
that  their  organization  is  a  corporation  de  facto;  that  nothing  short 
of  a  corporation  dejure  will  do.  But  if  we  adopt  the  growing  doctrine, 
supported,  as  we  shall  show,  by  the  overwhelming  weight  of  authority 
in  this  country,  that  a  person  who  contracts  with  a  de  facto  corpora- 
tion, the  members  of  the  latter  and  such  person  believing,  in  good 
faith,  in  its  legal  existence,  such  members  cannot  be  held  personally 
liable,  then  we  concede,  necessarily,  that  it  is  not  essential  to  freedom 
from  such  liability  that  all  the  statutory  requisites  to  the  existence 
of  a  corporation  be  complied  with,  because,  when  that  is  done, 
the  organization,  obviously,  is  a  not  a  corporation  de  facto  only; 
it  is  a  corporation  de  jure.  This  is  too  plain  to  admit  of  serious 
discussion. 

While  the  decision  in  this  case,  as  I  read  the  opinion  of  the  court, 
in  one  view,  goes  upon  the  ground  that  the  members  of  a  de  facto 
corporation  are  not  responsible  personally,  inasmuch  as  it  may  be 
held  that  the  decision  really  is  to  the  effect  that  personal  liability 
exists  because  all  the  conditions  precedent  to  a  corporation  de  jure 
were  not  complied  with,  some  reference  to  authorities  on  the  subject 
of  whether  to  escape  such  liability  it  is  necessary  that  the  corporation 
exist  in  fact  may  be  proper. 

The  development  of  the  law  on  this  subject  has  been  rapid  in 
recent  years  in  the  direction  of  holding  that  the  state  only  can  chal- 
lenge the  legality  of  the  exercise  of  corporate  powers.  The  ancient 
doctrine  was  that  all  contracts  made  by  a  corporation  in  excess  of  its 
powers  were  void.  That  has  not  been  changed,  but  the  doctrine  has 
grown  up,  and  become  well-nigh  universal,  that  the  state  only  can 
raise  the  question  by  proceedings  to  punish  the  corporation. 


362  LAW  AND  BUSINESS 

Our  court  is  fully  committed  to  such  doctrine.  John  V.  Farwell 
Co.  v.  Wolf,  70  N.W.  289.  Following  closely  upon  the  growth  of 
such  doctrine  as  applied  to  transactions  in  excess  of  corporate  powers, 
where  there  is  no  question  as  to  the  existence  of  the  corporation,  it 
has  been  extended,  so  as  to  prevent  private  persons,  who  have 
contracted  with  a  de  facto  corporation,  from  questioning  its  existence; 
holding  that  sovereign  power  only  can  raise  that  question.  This 
court  having  fully  adopted  the  doctrine  where  there  is  a  corporation 
in  fact,  how  it  can  be  rejected  where  the  corporation  is  de  facto 
merely,  is  not  perceived,  inasmuch  as  a  controlling  reason  for  it  in  the 
one  case  applies  equally  to  the  other.  In  both  cases  there  is  an 
exercise  of  powers  that  can  only  be  lawfully  exercised  by  sovereign 
authority;  hence  the  unauthorized  exercise. of  power  constitutes  a 
public  offense,  not  against  any  individual,  but  against  the  sovereignty 
of  the  state. 

From  the  foregoing,  we  are  warranted  in  asserting  that,  by 
well-settled  principles  of  law,  the  agricultural  association  with  whom, 
plaintiff  contracted  was  a  de  facto  corporation.  Every  element 
necessary  to  make  it  such  appears  clearly  by  the  record.  There  was 
a  law  under  which  it  might  have  existed.  The  association  prepared 
their  constitution,  and  adopted  it  in  the  form  of  ordinary  articles  of 
organization,  under  the  general  incorporating  act,  and  by  mistake 
they  filed  it  for  record,  and  it  was  recorded  and  returned,  instead  of 
filing  it  to  be  left  in  the  office,  as  the  law  requires.  They  supposed 
that  they  had  corporate  existence  by  reason  of  the  recording  of  their 
articles  of  organization.  They  assumed  to  act  as  a  corporation,  and 
exercised  corporate  powers  for  a  considerable  length  of  time,  and, 
for  aught  that  appears,  in  the  utmost  good  faith.  Certainly  the 
existence  of  the  law,  the  making  and  recording  of  articles  of  organiza- 
tion, in  an  honest  attempt  to  become  a  corporation,  and  the  honest 
assumption  and  exercise  of  corporate  powers,  prima  facie  establishes 
good  faith.  Plaintiff  supposed  that  the  corporation  was  a  corporate 
body  till  long  after  his  contract  relations  with  the  association  ceased. 
Now  to  allow  him  to  come  and  say  that  the  corporation  did  not  exist 
which  all  supposed  had  legal  existence,  that,  though  the  officers  of  the 
association  and  plaintiff  contracted  for  a  corporate  liability  on  the 
part  of  the  former,  it  shall  be  held,  nevertheless,  that  the  members 
of  such  association  are  bound  as  partners,  in  direct  violation  of  the 
well-settled  law  that  such  an  association,  under  the  circumstances, 
was  a  de  facto  corporate  body;  that,  as  between  the  parties,  the 


FORMATION  OF  THE  BUSINESS  UNIT  363 

relations  are  the  same  in  all  respects  as  though  the  corporation  had  a 
de  jure  existence,  and  contrary  to  the  settled  doctrine,  as  I  believe, 
of  this  and  most  other  courts,  is  what  the  judgment  of  this  case 
does,  in  my  opinion. 

I  think  the  judgment  of  the  circuit  court,  holding  the  defendants 
liable  as  partners,  was  wrong,  and  that  it  should  be  reversed,  and  the 
cause  remanded  for  a  new  trial. 

QUESTIONS 

1.  What  statutory  provision  did  the  incorporators  fail  to  comply  with  in 
this  case?    What  was  the  purpose  of  the  provision?    Was  not  the 
purpose  of  the  provision  met  in  spirit  by  what  the  incorporators  did  ? 

2.  If  the  view  of  the  majority  of  the  court  is  accepted,  is  there  any  real 
difference  between  a  de  facto  corporation  and  a  de  jure  corporation  ? 

3.  The  law  states  that  the  articles  of  incorporation  shall  name  "  the  principal 
place  of  business."    A,  B,  and  C  state  in  their  articles  that  the  business 
is  to  be  carried  on  in  Chicago  but  do  not  state  that  Chicago  is  the  "prin- 
cipal place  of  business."    Is  this  a  de  jure  corporation?    If  not,  is  it  a 
de  facto  corporation  ? 

4.  The  law  provides  that  the  articles  shall  state  "the  duration  of  the 
corporation,  not  to  exceed  fifty  years."    The  incorporators  state  in  their 
articles  that  the  corporation  is  organized  for  a  period  of  ninety  years. 
Is  this  a  de  jure  corporation  ?    Is  it  a  de  facto  corporation  ? 

5.  The  law  provides  that  the  articles  shall  be  signed  and  acknowledged  by 
the  incorporators  before  some  officer  authorized  to  administer  an  oath. 
Five  incorporators  of  a  certain  corporation  sign  the  articles,  but  only 
four  acknowledge  them.    Is  the  organization  a  de  jure  corporation? 
Is  it  a  de  facto  corporation  ? 

6.  It  is  said  that,  in  addition  to  other  requirements,  the  incorporators  must 
show  a  corporate  user  to  establish  the  existence  of  a  corporation  de  facto. 
Why  is  this  necessary  ?    What  constitutes  a  corporate  user  sufficient  to 
satisfy  this  requirement  ? 

FLETCHER  v.  PULLEN 
70  Maryland  Reports  205  (1889) 

MILLER,  J.  The  plaintiffs  who  are  nursery  men  in  Milford, 
Delaware,  sued  Bramble  and  Fletcher  as  partners  in  the  same  business 
at  Cambridge  in  this  state,  for  fruit  trees  sold  and  delivered  to  them 
in  the  autumn  of  1886.  Bramble  died  before  the  trial,  and  Fletcher 
defended  upon  the  ground  that  he  was  not  a  partner.  The  exceptions 
relate  mainly  to  the  admissibility  of  evidence  upon  the  question,  not 
whether  Fletcher  and  Bramble  were  actually  partners  inter  sese,  but 


364  LAW  AND  BUSINESS 

whether  Fletcher  had  held  himself  out,  or  had  permitted  himself  to 
be  held  out,  as  a  partner,  so  as  to  become  responsible  to  third  parties. 

The  law  on  this  subject,  well  established  by  authority,  may  be 
stated  thus:  The  ground  of  liability  of  a  person  as  partner  who  is  not 
so  in  fact,  is  that  he  has  held  himself  out  to  the  world  as  such,  or  has 
permitted  others  to  do  so,  and  by  reason  thereof  is  estopped  from 
denying  that  he  is  one  as  against  those  who  have,  in  good  faith,  dealt 
with  the  firm  or  with  him  as  a  member  of  it.  But  it  must  appear  that 
the  person  dealing  with  the  firm  believed,  and  had  a  reasonable  right 
to  believe,  that  the  party  he  seeks  to  hold  as  a  partner  was  a  member 
of  the  firm  and  that  the  credit  was,  to  some  extent,  induced  by  this 
belief.  It  must  also  appear  that  the  holding  out  was  by  the  party, 
sought  to  be  charged,  or  by  his  authority  or  with  his  knowledge  or 
assent.  This,  where  it  is  not  the  direct  act  of  the  party,  may  be  inferred 
from  circumstances,  such  as  from  advertisements,  shop-bills,  signs 
or  cards,  and  from  various  other  acts  from  which  it  is  reasonable 
to  infer  that  the  holding  out  was  with  his  authority  or  with  his  knowl- 
edge or  assent.  .And  whether  a  defendant  has  so  held  himself  out, 
or  permitted  it  to  be  done,  is  in  every  case  a  question  of  fact,  and  not 
of  law.  These  general  rules  apply  to  the  present  case. 

The  evidence  shows  that  there  was,  in  or  near  Cambridge,  a  fruit 
farm  and  nursery  on  about  fifteen  acres  of  Fletcher's  land  which  Bram- 
ble had  occupied  and  managed  from  the  year  1881  to  1887.  The  plain- 
tiffs then  proved  that  in  October  and  November,  1886,  they  received 
several  letters,  postal-cards,  telegrams,  and  circulars  from  Cambridge 
signed  "Fletcher  and  Bramble,"  representing  them  to  be  partners, 
and  the  envelopes  in  which  the  letters  were  inclosed  were  stamped 
with  the  same  firm  name.  These  letters  contained  orders  for  fruit 
trees,  and  the  first  of  them  gave  a  reference  to  a  Mr.  Van  Horse, 
formerly  of  Milford,  but  then  residing  in  Cambridge.  The  plaintiffs 
not  knowing  the  firmr  nor  by  whom  the  letters  were  written,  wrote 
to  Van  Horse  and  others  inquiring  as  to  its  credits  and  standing,  and 
in  reply  received  information  to  the  effect  that  Fletcher  was  entirely 
responsible,  but  that  Bramble  was  worth  nothing.  Upon  this 
information,  and  receiving  no  intimation  that  Fletcher  was  not  a 
partner,  they  filled  the  orders  and  delivered  the  trees,  relying  upon 
his  credit.  Each  item  of  this  testimony  was  excepted  to  as  it  was 
offered,  upon  the  ground  that  these  letters,  circulars,  and  envelopes 
were  written  and  gotten  up  by  Bramble  without  Fletcher's  knowledge 
or  consent.  We  think,  however,  they  were  all  admissible,  not 


FORMATION  OF  THE  BUSINESS  UNIT  365 

because  the  acts  and  declarations  of  Bramble  would  bind  Fletcher, 
as  of  course  they  would  not  unless  he  was  an  actual  partner,  but  for 
the  purpose  of  showing  that  the  plaintiffs  believed,  and  had  good 
reasons  to  believe  that  he  was  a  partner,  and  that  they  trusted  the 
supposed  firm  upon  the  faith  of  his  responsibility^  To  prove  this 
was  an  important  link  in  the  plaintiffs'  case,  and  evidence  tending 
to  prove  it  was  in  our  opinion  admissible. 

The  plaintiffs  then  proved  that  an  advertisement  signed  "Fletcher 
&  Bramble, "  calling  attention  to  their  nursery,  offering  their  trees  for 
sale,  and  soliciting  from  the  public  continuance  of  confidence  and 
orders,  was  published  in  two  weekly  newspapers  of  Cambridge  where 
Fletcher  lived  for  three  months  during  the  year  1884.  In  one  of  these 
papers  there  was  also  a  local  notice  of  the  advertisement.  They  were 
also  prepared,  inserted,  and  paid  for  by  Bramble  without  Fletcher's 
knowledge,  but  it  was  proved  that  during  the  time  of  their  publication 
he  was  a  subscriber  to  both  papers,  and  they  were  regularly  sent  to  him. 
There  is  also  clear  proof  that  he  actually  knew  of  them  while  they  were 
being  published  and  never  inserted  in  either  of  the  papers  any  denial 
of  the  partnership.  From  all  this  it  was  competent  for  a  jury  to  infer 
that  he  was  held  out  to  the  public  by  Bramble  as  a  partner,  with  his 
knowledge  and  assent,  and  we  are  of  opinion  the  plaintiffs  were  entitled 
to  prove  this  though  they  never  saw  the  advertisements  and  were  not 
influenced  by  them  in  trusting  the  firm.  They  had  already  proved 
they  had  so  trusted  it  in  good  faith,  and  upon  good  grounds,  and  we 
think  they  had  the  right  to  resort  to  these  antecedent  advertisements 
and  to  this  proof  for  the  purpose  of  showing  that  Fletcher  had  been 
so  held  out  to  the  public  with  his  knowledge  and  assent.  It  was 
evidence  to  go  to  the  jury  upon  that  subject,  and  if  uncontradicted 
would  have  made  him  a  partner,  at  least,  as  to  all  third  parties  who 
had  trusted  the  firm  in  good  faith  upon  that  supposition.  Having 
knowledge  of  these  advertisements  it  was  his  duty  to  deny  the  partner- 
ship if  he  wished  to  escape  liability.  But  what  was  he  to  do  and  how 
much?  We  do  not  say  he  was  under  a  legal  obligation  to  publish 
a  repudiation  of  the  partnership  in  the  same  newspapers  or  in  any 
other,  though  this  would  seem  to  be  a  very  obvious  and  the  most 
efficient  mode  of  proclaiming  such  denial,  and  the  fact  that  he  failed 
to  do  so  was  a  circumstance  to  go  to  the  jury.  But  we  take  it  that  the 
rule  upon  this  subject  stated  by  a  very  eminent  jurist  is  reasonable 
and  just:  "  If  one  is  held  out  as  a  partner  and  he  knows  it,  he  is  charge- 
able as  one  unless  he  does  all  that  a  reasonable  and  honest  man 


366  LAW  AND  BUSINESS 

should  do  under  similar  circumstances,  to  assert  and  manifest  his 
refusal  and  thereby  prevent  innocent  parties  from  being  misled." 
Parsons  on  Partnership,  134. 

It  follows  that  the  court  below  was  right  in  admitting  all  the 
evidence  offered  by  the  plaintiffs  and  in  rejecting  the  defendant's 
first  prayer.  In  regard  to  his  second,  third,  and  fourth  prayers  all 
that  need  be  said  is  that  the  propositions  they  contain  are  all  embraced 
in  his  fifth  prayer  which  the  court  granted,  with  a  single  modification 
to  which  we  see  no  valid  objection. 

We  come  now  to  the  rulings  excluding  certain  evidence  offered 
by  the  defendant  to  show  and  sustain  his  denial  and  repudiation 
of  the  partnership.  His  own  testimony  was  to  the  effect  that  Bramble 
was  simply  his  tenant  of  the  land  for  the  term  of  six  years  from  1881; 
that  Bramble  had  a  fruit  tree  nursery  on  the  land,  but  he  himself 
had  nothing  to  do  with  it,  and  never  entered  into  a  contract  of  partner- 
ship with  Bramble,  either  written  or  verbal,  in  the  nursery  business 
or  any  other;  that  he  never  held  himself  out  as  such  partner,  and 
never  lent  his  name  or  authorized  the  use  of  it  by  Bramble  with 
reference  to  this  business  or  any  other;  that  he  never  knew  of  the 
letters,  circulars,  and  envelopes  written  and  used  by  Bramble  until 
they  were  produced  in  court  at  the  trial;  that  the  advertisements 
and  local  notice  were  inserted  without  his  knowledge  or  consent, 
and  he  never  knew  anything  about  them  until  they  appeared  in  the 
papers;  that  he  never  put  himself  to  the  trouble  and  expense  of 
publishing  in  these  papers  or  in  any  others  a  contradiction  of  the 
advertisements,  but  had  on  all  occasions  to  town  people  and  country 
people  when  the  subject  was  mentioned  to  him,  and  often  when  it 
was  not,  denied  the  existence  of  any  partnership,  and  repudiated 
the  advertisements  as  unauthorized  by  him.  All  this  was  allowed  to 
go  in  without  objection  but  it  is  to  be  observed  that  he  admits  he  knew 
of  the  advertisements  which  clearly  and  publicly  proclaimed  the 
partnership,  and  never  published  in  any  newspaper  any  denial  of  it.: 
We  have  said  he  was  under  no  legal  obligation  to  make  publication, 
but  that  it  was  his  duty  to  do  all  that  a  reasonable  and  honest  man* 
should  do  under  similar  circumstances  to  manifest  his  denial.  This 
is  the  important  question  in  the  case  and  it  was  one  solely  for  the 
jury  to  determine.  On  this  issue  of  fact  he  was  entitled  to  adduce 
all  the  evidence  he  could,  leaving  it  for  the  jury  to  decide  whether 
upon  the  whole  of  it,  they  thought  he  had  done  all  that  a  reasonable 
and  honest  man  ought  to  have  done.  Under  this  rule  he  was  entitled 


FORMATION  OF  THE  BUSINESS  UNIT  367 

to  the  benefit  of  any  evidence  in  corroboration  of  his  own  testimony 
which  tended  to  prove  the  publicity  of  his  denial. 

Now  in  addition  to  his  own  general  evidence  on  this  subject  he 
offered  to  prove: 

1.  By  the  editor  of  one  of  the  papers  in  which  the  advertisement 
and  notice  appeared,  that  when  the  witness  called  upon  him  to  pay 
for  the  same,  he  refused  to  do  so,  repudiated  all  partnership  with 
Bramble,  declared  he  had  nothing  to  do  with  Bramble's  business, 
and  would  have  nothing  to  do  with  his  bills. 

2.  By  the  postmaster  of  Cambridge,  that  soon  after  the  publication 
of  the  advertisements,  witness  delivered  to  Fletcher  certain  mail 
matter  addressed  to  "Fletcher  &  Bramble,"  but  he  returned  it 
unopened,  and  refused  to  accept  the  same,  telling  witness  he  had 
nothing  to  do  with  Bramble's  business,  and  was  no  partner  of  his. 

3.  That  in  July,  1885,  he  and  Bramble  were  sued  as  partners 
by  the  steamboat  company  before  a  magistrate  in  Cambridge  on  a 
bill  for  freight;   that  there  was  a  crowd  at  the  trial,  and  he  resisted 
the  suit  and  refused  to  pay  the  account,  on  the  ground  that  he  had 
nothing  to  do  with  Bramble's  business;    that  the  magistrate  gave 
judgment  in  his  favor,  and  the  case  was  much  discussed  in  the  com- 
munity, especially  by  the  steamboat  agent  who  made  great  complaint, 
because  the  magistrate  had  decided  in  his  favor. 

In  our  opinion  these  items  of  evidence  should  have  been  admitted. 
It  is  not  for  this  court  to  pass  upon  their  weight  or  effect,  no  matter 
how  slight  or  inadequate  as  a  denial  of  the  partnership  publicly  pro- 
claimed in  the  newspapers,  we  may  deem  them  to  be.  This  is  a  matter 
solely  for  the  jury.  Our  duty  is  simply  to  determine  the  question  of 
their  admissibility  as  evidence,  and  we  think  the  court  erred  in 
rejecting  them. 

We  are  also  of  opinion  that  the  agreement,  or  lease  as  it  is  called, 
between  Fletcher  and  Bramble,  for  the  land  upon  which  the  nursery 
was  carried  on,  should  have  been  admitted.  It  was  part  of  the 
defendant's  case  to  prove  that  he  was  not  an  actual  partner  with 
Bramble.  This  agreement  was  admissible  for  that  purpose,  if  he 
could  show  that  by  its  true  construction  it  merely  created  the  relation 
of  landlord  and  tenant  between  them. 

The  error  of  rejecting  the  items  of  evidence  referred  to,  requires 
us  to  reverse  the  judgment  and  award  a  new  trial.  But  in  view  of  the 
fact  that  the  court  below,  acting  as  a  jury,  found  for  the  plaintiffs 
notwithstanding  they  had  granted  the  defendant's  fifth  prayer,  in 


368  LAW  AND  BUSINESS 

which  all  his  own  testimony  in  denial  of  the  partnership  was  expressly 
submitted  to  the  consideration  of  the  judges,  we  think  each  party 
should  be  required  to  pay  his  own  costs,  both  in  this  court  and  the 

court  below. 

Judgment  reversed  and  a  new  trial  awarded. 

QUESTIONS 

1.  Would  the  court  in  this  case  have  reached  the  conclusion  that  there  was 
a  partnership  in  case  a  controversy  had  arisen  between  Bramble  and 
Fletcher? 

2.  X  stated  to  P  that  D  was  a  partner  in  his,  X's,  business.     P  extended 
credit  to  X  in  reliance  on  this  statement.     P  sues  D  as  a  partner  in  the 
business.    What  decision  ? 

3.  For  a  year  or  more  X  had  been  using  letter-heads  on  which  D's  name 
appeared  as  a  partner  in  X's  business.     P  extended  credit  to  the  business, 
relying  on  this  fact.    What  are  the  rights  of  P  against  D  ? 

4.  X,  with  D's  knowledge  and  acquiescence,  represents  that  D  is  a  partner 
in  the  business.     P,  in  ignorance  of  this  representation,  extends  credit 
to  X.     P  sues  X  on  the  debt  and  joins  D  as  a  partner.    What  decision  ? 

5.  D,  aware  that  X  is  holding  him  out  as  a  partner,  publishes  a  notice  in 
the  daily  newspaper,  which  has  a  wide  circulation  in  the  territory  in 
which  X  does  business,  disclaiming  any  connection  with  the  business. 
P,  knowing  of  X's  representation  but  ignorant  of  P's  disclaimer,  extends 
credit  to  X.    What  are  his  rights,  if  any,  against  D  ? 

6.  A,  B,  and  C  are  assuming  to  act  as  a  corporation  under  the  name  of  the 
Southside  Express  Co.  although  they  have  taken  inadequate  steps  to 
incorporate  their  business.    D  executes  a  promissory  note  to  them  in 
the  name  of  the  Southside  Express  Co.,  reasonably  believing  that  he  is 
dealing  with  a  corporation.    Action  is  brought  on  the  note  in  the  name 
of  the  Southside  Express  Co.,  as  a  corporation.    D  contends  that  the 
action  is  improperly  brought  because  the  organization  is  not  a  corporation. 
What  decision  ? 

7.  A,  B,  and  C,  in  the  name  of  the  Southside  Express  Co.,  execute  a  note  to  P. 
P,  at  the  time  he  accepts  the  note,  reasonably  believes  that  he  is  dealing 
with  a  corporation.    P  sues  the  Southside  Express  Co.  on  the  obligation. 
A,  B,  and  C  contend  that  the  action  is  improperly  brought  because  the 
Southside  Express  Co.  is  not  a  corporation.    What  decision  ? 

8.  C  brings  proceedings  to  subject  D's  property  to  the  payment  of  a 
debt  of  an  alleged  corporation  of  which  D  is  a  member.    D  opposes  the 
proceedings  on  the  ground  that  the  incorporators  of  the  alleged  corpora- 
tion so  far  failed  to  comply  with  the  incorporating  law  that  the  organi- 
zation never  became  even  a  de  facto  corporation.    What  decision  ? 

9.  What  essential  requirements  must  be  shown  to  establish  the  existence 
of  an  estoppel  corporation  ? 


CHAPTER  IV 

FINANCING  THE  BUSINESS  UNIT 

i.    In  General 

THE  ROBINSON  BANK  v.  MILLER 
153  Illinois  Reports  244  (1894) 

The  original  bill  in  these  consolidated  causes  was  filed  by  certain 
persons,  doing  a  banking  business  as  partners  under  the  name  of  the 
Robinson  Bank,  for  the  purpose  of  removing  the  three  mortgages 
hereinafter  named  as  clouds  upon  the  title  of  Abner  P.  Woodworth, 
trustee  for  said  bank,  to  four  acres  of  land  in  Robinson  in  the  county 
of  Crawford.  Upon  the  first  trial  in  the  circuit  court  all  the  mortgages 
were  set  aside.  Upon  appeal  to  the  Appellate  Court  the  decree  of 
the  circuit  court  was  reversed,  and  the  cause  was  remanded.  The 
cause  was  heard  a  second  time  in  the  circuit  court;  and,  at  the  second 
hearing,  the  mortgage  to  Lamport  was  set  aside  as  fraudulent,  and 
his  cross-bill  to  foreclose  the  same  was  dismissed,  but  the  two  Emmons7 
mortgages  were  sustained  as  valid,  and  the  prayers  of  the  cross-bills 
and  supplemental  cross-bills  to  foreclose  the  same  were  granted  by 
the  entry  of  a  decree  of  foreclosure.  The  second  decree  of  the  circuit 
court  has  been  affirmed  by  the  Appellate  Court,  and  the  present 
appeal  is  prosecuted  from  such  judgment  of  affirmance. 

MAGRUDER,  J.  The  Robinson  Bank,  one  of  the  appellants  herein, 
claims  that  the  mill  property  including  the  four  acres  of  land  upon 
which  the  mill  was  located,  was  partnership  property  belonging  to 
the  firm  of  Newton,  Emmons  &  Miller,  that,  as  such,  it  was  first 
liable  to  be  subjected  to  the  payment  of  the  partnership  creditors, 
including  the  bank;  that  the  mortgagees,  Lamport,  Walter  and 
Willis,  and  Wiley  S.  Emmons,  were  individual  creditors  of  Miller 
and  John  S.  Emmons,  and  only  entitled  to  such  surplus  as  might  arise 
out  of  the  mill  property  after  the  payment  therefrom  of  the  firm  debts. 

Whether  real  estate,  upon  which  a  partnership  transacts  its  busi- 
ness, is  firm  property  or  the  property  of  the  individual  members  of  the 
firm,  is  oftentimes  a  difficult  question  to  determine,  and  one  upon 
which  the  authorities  are  not  altogether  uniform. 

369 


370  LAW  AND  BUSINESS 

The  mere  fact  of  the  use  of  land  by  a  firm  does  not  make  it  partner- 
ship property.  (Goepper  v.  Ginsinger,  39  Ohio  St.  429;  Hanchett  v. 
Blanton,  72  Ala.  423.)  Nor  is  real  estate  necessarily  the  individual 
property  of  the  members  of  a  firm  because  the  title  is  held  by  one  mem- 
ber, or  by  the  several  members  in  undivided  interests,  (i  Bates 
on  Law  of  Partnership,  sec.  280.)  Whether  real  estate  is  partnership 
or  individual  property  depends  largely  upon  the  intention  of  the 
partners.  That  intention  may  be  expressed  in  the  deed  conveying 
the  land,  or  in  the  articles  of  partnership,  but  when  it  is  not  so 
expressed,  the  circumstances,  usually  relied  upon  to  determine  the 
question,  are  the  ownership  of  the  funds  paid  for  the  land,  the  use  to 
which  it  is  put,  and  the  manner  in  which  it  is  entered  in  the  accounts 
upon  the  books  of  the  firm,  (i  Bates  on  Law  of  Partnership,  sec. 
280;  2  Lindley  on  Part.  marg.  p.  649;  17  American  and  English 
Encyclopedia  of  Law,  p.  945,  and  cases  in  note.) 

Where  real  estate  is  bought  with  partnership  funds  for  partner- 
ship purposes,  and  is  applied  to  partnership  uses,  or  entered  and  carried 
in  the  accounts  of  the  firm  as  a  partnership  asset,  it  is  deemed  to  be 
firm  property;  and,  in  such  case,  it  makes  no  difference,  in  a  court  of 
equity,  whether  the  title  is  vested  in  all  the  partners  as  tenants  in 
common,  or  hi  one  of  them,  or  in  a  stranger.  (Parsons  on  Partnership 
[4th  ed.],  sec.  265;  i  Bates  on  Law  of  Partnership,  sec  281;  Johnson 
v.  Clark,  1 8  Kans.  157;  17  American  and  English  Encyclopedia  of  Law, 
p.  948,  and  cases  cited.)  If  the  real  estate  is  purchased  with  partner- 
ship funds,  the  party  holding  the  legal  title  will  be  regarded  as  holding 
it  subject  to  a  resulting  trust  in  favor  of  the  firm  furnishing  the  money. 
In  such  case  no  agreement  is  necessary;  and  the  statute  of  frauds 
has  no  application.  (Parker  v.  Bowles,  57  N.H.  491;  i  Bates  on 
Law  of  Partnership,  sec.  281.) 

In  the  case  at  bar,  the  land  was  not  purchased  with  partnership 
funds.  The  undivided  one-third  interest  bought  by  John  S.  Emmons 
was  paid  for  by  him  with  his  own  individual  money.  Miller  also  paid 
for  the  one  undivided  one-third  interest,  purchased  by  him,  with  his 
individual  funds.  None  of  the  money  of  the  firm  of  Newton,  Emmons 
&  Miller  was  contributed  toward  the  purchase  of  the  one-third  interest 
held  by  Newton.  Indeed,  the  proof  shows,  that  the  firm  of  Newton, 
Emmons  &  Miller  was  formed  by  an  oral  agreement  after  Emmons 
and  Miller  had  bought  their  interests.  Each  partner  here  held  the 
title  to  an  undivided  one-third  part  of  the  property.  No  entries  were 
made  upon  the  books  of  the  firm  showing  that  the  real  estate  was 


FINANCING  THE  BUSINESS  UNIT  371 

treated  as  firm  assets.  The  evidence,  however,  does  show  that  the 
property  was  bought  for  the  purpose  of  being  used  in  the  milling 
business,  and  that,  after  its  purchase,  it  was  used  for  firm  purposes 
and  that  the  firm  gave  its  notes  to  pay  for  repairs,  and  for  placing 
new  machinery  in  the  mill  upon  the  premises.  Under  these  circum- 
stances was  the  land  partnership  property,  or  the  individual  property 
of  the  partners  holding  as  tenants  in  common  ? 

It  cannot  be  said  that  the  land  is  firm  property  upon  the  theory 
of  a  resulting  trust,  because  the  money  of  the  firm  was  not  used  to 
buy  the  property.  Such  a  trust  might  exist  in  favor  of  the  firm, 
regarding  it  as  a  person,  if  the  partners  had  taken  the  legal  title,  and 
the  firm  had  advanced  the  purchase  money.  The  trust  must  arise 
at  the  time  of  the  execution  of  the  conveyance,  and  when  the  title 
vests  in  the  grantee.  Such  could  not  have  been  the  case  here  under 
the  facts  stated.  (Van  Buskirk  v.  Van  Buskirk,  148  111.  9.)  In  view 
of  the  fact  that  the  land  was  bought  with  individual,  and  not  partner- 
ship, funds  and  was  conveyed  in  undivided  interests  to  the  several 
partners,  and  in  the  absence  of  any  agreement  that  it  should  be 
regarded  as  firm  property,  does  the  conduct  of  the  parties  in  afterward 
forming  a  partnership,  and  using  the  property  for  partnership 
purposes,  and  repairing  and  improving  the  mill  at  the  expense  of 
the  firm,  make  the  land  firm  property  in  a  court  of  equity?  A 
negative  answer  to  this  question  is  found  in  many  of  the  authorities. 

The  general  doctrine  of  all  these  cases  is,  that  a  purchase  of  the 
land  with  partnership  funds  is  necessary  to  make  it  firm  property. 
Parsons  in  his  work  on  Partnership  (4th  ed.)  says:  "Although  it 
(real  estate)  be  held  in  the  joint  name  of  two  or  more  persons,  if 
there  be  no  proof  that  it  was  purchased  with  partnership  funds  for 
partnership  purposes,  it  will  be  considered  as  held  by  them  as  joint 
tenants,  or  tenants  in  common;  so,  if  not  paid  for  by  partnership 
funds,  then,  it  is  probably  his  property  who  pays  for  it,  whatever 
use  he  permits  to  be  made  of  it."  (Sees.  265,  266.)  In  Hanchett  v. 
Blanton,  supra,  the  supreme  court  of  Alabama  says:  " Steering  clear 
of  all  cases  of  fraud  or  of  the  use  by  one  partner,  without  the  approba- 
tion of  his  associates,  of  partnership  funds  in  the  acquisition  of  real 
estate,  the  two  facts  must  concur  to  constitute  real  estate  partnership 
property — acquisition  with  partnership  funds,  or  on  partnership 
credit,  and  for  the  uses  of  the  partnership."  In  Thompson  v.  Bowman, 
supra,  the  Supreme  Court  of  the  United  States  says:  "In  the  absence 
of  proof  of  its  purchase  with  partnership  funds  for  partnership 


372  LAW  AND  BUSINESS 

purposes,  real  property  standing  in  the  names  of  several  persons  is 
deemed  to  be  held  by  them  as  joint  tenants  or  as  tenants  in  common." 
(Buchan  v.  Sumner,  2  Barb.  Ch.  165.) 

QUESTIONS 

1.  Does  a  partnership  have  capital  stock  ?    Does  it  have  capital  ? 

2.  What  constitutes  the  capital  of  a  partnership?    How  is  it  acquired? 
How  is  it  held  ? 

3.  A  and  B  are  partners  in  a  teaming  business.    A  buys  a  team  of  horses 
with  his  own  money  but  uses  them  in  the  firm  business.     Can  the  horses 
be  seized  as  firm  property  ? 

4.  A  buys  real  estate  with  firm  money  but  takes  title  in  his  own  name. 
Is  the  land  to  be  regarded  as  individual  or  partnership  property  ? 

5.  Since  the  liability  of  each  partner  is  unlimited,  what  difference  does  it 
make  whether  a  given  piece  of  property  belongs  to  the  firm  or  to  the 
individual  partners  ? 

6.  What  is  meant  by  the  capital  stock  of  a  corporation  ? 

7.  What  is  the  difference  between  the  capital  stock  and  the  authorized 
capital  stock  of  a  corporation  ? 

8.  What  is  the  difference  between  the  capital  and  the  capital  stock  of  a 
corporation  ? 

9.  How  is  the  amount  of  the  capital  stock  of  a  corporation  determined? 
What  determines  the  capital  of  a  corporation  ? 

EINSTEIN  v.  RARITAN  WOOLEN  MILLS 
74  New  Jersey  Equity  Reports  624  (1908) 

Ho  WELL,  V.  C.  The  Raritan  Woolen  Mills  was  incorporated 
by  a  special  act  of  the  legislature  of  New  Jersey  entitled  "An  act  to 
incorporate  the  Raritan  Woolen  Mills,"  which  act  was  approved 
March  23,  1896,  and  is  found  in  the  laws  of  that  year  at  page  536. 
The  charter  provides  that  the  capital  stock  shall  be  $100,000,  "with 
the  privilege  of  increasing  the  same  from  time  to  time  to  any  sum  not 
exceeding  $250,000."  Capital  stock  to  the  amount  of  $150,000  has 
been  issued  and  is  outstanding.  The  directors  have  passed  a  resolu- 
tion providing  for  the  amendment  of  the  company's  charter  by 
increasing  the  total  capital  stock  of  the  company  to  $525,000,  $150,000 
of  which  shall  be  first  preferred  cumulative  7  per  cent  stock,  and  the 
remainder  common  stock.  The  resolution  further  provides  that  the 
present  outstanding  common  stock  of  the  corporation  shall  be  con- 
verted into  the  first  preferred  cumulative  7  per  cent  stock  which  the 


FINANCING  THE  BUSINESS  UNIT  373 

resolution  provides  for;  so  that  when  the  change  shall  have  been 
effected  the  capital  stock  of  the  corporation  shall  consist  of  $150,000 
of  preferred  stock  and  $375,000  of  common  stock.  The  directors 
have  called  a  meeting  of  the  stockholders  to  vote  upon  the  adoption 
by  them  of  the  resolution,  and  the  complainant,  who  is  one  of  the 
stockholders  of  the  corporation,  now  files  his  bill  to  enjoin  the  corpora- 
tion, its  officers  and  directors,  from  increasing  the  capital  stock  or 
issuing  any  preferred  stock  or  converting  the  present  outstanding 
issue  of  $150,000  of  common  stock  into  a  like  amount  of  preferred 
stock,  and  restraining  the  stockholders  from  voting  at  the  stock- 
holders' meeting  in  favor  of  the  directors'  resolution.  Two  questions 
are  raised:  first,  the  power  of  the  corporation  without  the  universal 
consent  of  its  shareholders  to  increase  the  amount  of  its  capital 
stock;  second,  the  right  of  the  corporation  to  issue  preferred  stock 
and  compel  its  substitution  for  the  present  outstanding  common 
stock  without  the  consent  of  all  the  shareholders.  The  charter  of  the 
corporation  confers  upon  it  the  general  powers  and  subjects  it  to  the 
general  restrictions  contained  in  the  Corporation  Act  of  1846  (P.L., 
1846,  p.  16),  and  it  may  be  sufficient,  without  further  reference  to 
the  statute,  to  say  that  it  contains  no  specific  authority  to  a  cor- 
poration organized  under  it  to  do  any  of  the  things  that  are  attempted 
to  be  done  in  this  case.  The  charter  provides  in  so  many  words 
that  the  capital  stock  may  be  increased  from  time  to  time  to  any  sum 
not  exceeding  $250,000. 

This,  I  take  it,  is  a  limitation  upon  the  power  of  the  company 
which  is  part  of  the  contract  existing  between  the  stockholders 
among  themselves  and  between  the  stockholders  and  the  corporation 
itself,  and  that  it  cannot  be  abrogated  or  avoided  by  the  corporation 
or  by  its  directors,  or  by  any  majority,  however  large,  of  its  stock- 
holders against  the  objection  of  the  holder  of  a  single  share.  This  is 
on  the  ground  that  such  action  would  violate  that  provision  of  the 
federal  constitution  which  prohibits  the  states  from  passing  any 
laws  which  impair  the  obligation  of  contracts.  The  decisions  of  the 
Supreme  Court  of  the  United  States  are  the  final  authority  on  ques- 
tions arising  under  this  provision  of  the  Constitution,  because  they 
are  necessarily  federal  questions.  In  Chicago  City  Railway  v.  Allerton, 
1 8  Wall.  233  (1873),  the  question  which  is  now  before  the  court  arose 
for  final  decision  in  the  Supreme  Court  of  the  United  States.  The 
appellant  was  a  street  railway  company  having  a  capital  of  $1,250,000 
which  it  proposed  to  increase  to  $1,500,000.  The  appellee,  Allerton, 


374  LAW  AND  BUSINESS 

objected  and  filed  his  bill  to  prevent  the  increase.-  The  charter  of  the 
corporation  provided  the  capital  stock  should  be  $100,000,  and  that 
this  might  be  increased  from  time  to  time  at  the  pleasure  of  the  cor- 
poration, and  that  all  corporate  powers  of  the  corporation  should  be 
vested  in  and  exercised  by  the  board  of  directors  and  such  officers  and 
agents  as  the  board  should  appoint.  The  board  of  directors  attempted 
to  make  the  increase  by  a  mere  resolution  of  that  body.  Mr.  JUSTICE 
BRADLEY,  without  attempting  to  decide  questions  which  arose  under 
the  constitution  and  laws  of  the  state  of  Illinois,  affirmed  the  decree 
in  favor  of  the  complainant  below  upon  the  broad  ground  that  a  change 
so  organic  and  fundamental  as  that  'of  increasing  the  capital  stock 
of  the  corporation  beyond,  the  limit  fixed  by  the  charter  could  not  be 
made  by  the  directors  alone  unless  expressly  authorized  thereto. 
He  says: 

"Authority  to  increase  capital  stock  of  a  corporation  may 
undoubtedly  be  conferred  by  a  law  passed  subsequent  to  the  charter, 
but  such  a  law  should  regularly  be  accepted  by  the  stockholders; 
changes  in  the  purpose  and  object  of  an  association  or  in  the  extent 
of  its  constituency  or  membership  involving  the  amount  of  its  capital 
stock  are  necessarily  fundamental  in  their  character  and  cannot,  on 
general  principles,  be  made  without  the  express  or  implied  consent 
of  the  members."  This  case  has  been  followed,  and  its  authority 
has  never  been  questioned.  Its  doctrine  followed  in  Scoville  v, 
Thayer,  105  U.S.  143,  and  in  Bank  v.  Railroad  Co.,  13  N.Y.  599; 
Railroad  Co.  v.  Schuyler,  34  N.Y.  30;  Kent  v.  Quicksilver  Mining  Co., 
78  N.Y.  182.  I  quote  from  the  opinion  of  JUDGE  FOLGER  in  that 
case: 

There  is  a  power  in  this  charter  to  alter,  amend,  add  to  or  repeal,  at 
pleasure,  by-laws  before  made.  It  is  argued  from  this  that  it  was  in  the 
power  of  the  corporate  body,  in  due  form  and  manner,  to  alter  the  by-laws 
which  had  fixed  the  amount  of  the  capital  stock  and  the  number  and  relative 
value  of  the  shares  thereof.  The  power  to  make  by-laws  is  to  make  such 
as  are  not  inconsistent  with  the  constitution  and  the  law,  and  the  power 
to  alter  has  the  same  limit,  so  that  no  alteration  could  be  made  which  would 
infringe  a  right  already  given  and  secured  by  the  contract  of  the  corporation. 
Nor  was  the  power  to  alter,  to  the  extent  of  affecting  the  contracted  relative 
value  of  a  share,  reserved  when  the  share  was  sold  to  the  stockholder,  so  as 
to  enter  into  and  form  a  part  of  the  contract.  An  alteration  is  a  pro  tanto 
repeal;  but  no  private  corporation  can  repeal  a  by-law  so  as  to  impair  rights 
which  have  been  given  and  become  vested  by  virtue  of  the  by-law  afterwards 
repealed. 


FINANCING  THE  BUSINESS  UNIT  375 

The  reasoning  of  these  cases  goes  to  the  question  of  the  violation 
of  the  contract  as  alleged  by  the  complainant,  and  it  applies  to  the 
other  matters  mentioned  in  the  resolution,  namely,  the  creation  of 
preferred  stock  and  the  compelling  of  the  present  shareholders  to 
surrender  their  common  stock  and  accept  preferred  stock  in  lieu 
thereof.  It  is  true  that  at  the  time  of  the  creation  of  this  corporation 
there  was  an  act  in  force  (P.L.,  1860,  p.  603)  providing  that  manu- 
facturing corporations  might  create  two  kinds  of  stock,  viz.,  general 
stock  and  special  stock,  the  latter  at  no  time  to  exceed  half  the  capital 
paid  in,  and  subject  to  redemption  with  a  fixed  half  yearly  sum  or 
dividend  not  exceeding  4  per  cent  before  any  dividend  should  be  set 
apart  or  paid  on  the  general  stock.  This  act  was  repealed  on  April  9, 
1875,  without  any  reservation  of  any  rights  acquired  under  it,  and, 
at  any  rate,  if  it  were  a  part  of  the  company's  charter,  it  would  not 
authorize  the  present  action,  for  the  reason  that  the  rate  of  dividend 
provided  for  is  4  per  cent,  while  the  present  plan  contemplates  divi- 
dends at  the  rate  of  7  per  cent. 

All  the  other  provisions  of  our  statutes  relating  to  the  creation 
of  preferred  stock  have  been  passed  since  the  Raritan  Woolen  Mills 
was  organized  as  a  corporation,  and  it  not  appearing  in  the  case  that 
these  subsequent  provisions  have  been  accepted  by  the  shareholders 
as  amendments  to  the  charter,  I  feel  obliged  to  hold  that  there  is  no 
authority  for  the  creation  of  preferred  stock  without  the  consent 
of  every  shareholder.  The  same  line  of  argument  applies  to  the 
attempt  of  the  directors  to  convert  the  present  common  stock  into 
preferred  stock.  It  is  said  on  behalf  of  the  company  and  its  directors 
that  the  complainant  cannot  be  compelled  to  convert  his  own  stock 
into  preferred  stock,  and  that  he  therefore  need  not  do  it;  that  he 
may  continue  to  hold  it  as  common  stock,  and  that  inasmuch  as  one 
share  of  stock  is  like  another,  it  can  make  no  difference  to  him  whether 
he  holds  his  shares  which  have  been  theretofore  authorized  or  whether 
he  holds  shares  which  shall  be  authorized  by  virtue  of  the  resolution 
in  question.  The  reasoning  of  Mr.  JUSTICE  BRADLEY  in  the  Allerton 
Case  above  cited  seems  conclusive  on  this  point.  He  says: 

Second,  as  it  respects  the  constituency  or  capital  and  membership. 
This  is  the  next  most  important  fundamental  point  in  the  constitution  of 
a  body  corporate,  to  change  it  without  the  consent  of  the  stockholders 
would  be  to  make  them  members  of  an  association  in  which  they  never 
consented  to  become  such.  It  would  change  the  relative  influence,  control, 
and  profit  of  each  member;  even  when  the  additional  stock  is  distributed 


376  LAW  AND  BUSINESS 

to  each  stockholder  pro  rata  it  would  often  work  injustice,  because  some  of 
the  stockholders  might  be  unable  to  take  their  respective  shares  and  might 
thus  lose  their  relative  interest  and  influence  in  the  corporate  concerns. 

I  take  it  that  when  Mr.  JUSTICE  BRADLEY  speaks  of  the  consent  of 
the  shareholders  he  means  the  consent  of  every  shareholder,  and  that 
a  mere  majority,  however  large,  would  not  have  the  power  to  interfere 
with  the  rights  and  property  of  the  minority. 

My  attention  is  called  by  the  defendant  to  an  act  of  April  6,  1908 
(P.L.,  1908,  p.  127),  which  on  its  face  and  by  its  terms,  permits  to  be 
done  the  very  thing  that  is  sought  to  be  accomplished  in  this  case. 
But  I  am  unwilling  to  accede  to  this.  I  must  hold  that  this  act  is 
merely  the  consent  of  the  state  that  the  stockholders  may,  if  they 
all  agree,  do  the  things  which  are  provided  for  in  that  act.  But  if 
all  the  stockholders  do  not  agree  the  act  cannot  be  held  to  be  a  portion 
of  the  charter  of  the  corporation  or  an  amendment  thereto.  This  is 
specifically  held  in  Kean  v.  Johnston,  9  NJ.  Eq.  (i  Stock)  417; 
Zabriskie  v.  Hackensack  Railroad  Co.,  18  NJ.  Eq.  (3  C.  E.  Gr.)  178; 
Black  v.  United  Railroad  &  Canal  Co.,  24  NJ.  Eq.  (9  C.  E.  Gr.)  455; 
Mills  v.  New  Jersey  Central  Railroad  Co.,  41  NJ.  Eq.  (14  Stew.)  i, 
and  many  other  cases  which  have  engrafted  this  doctrine  into  our  law 
so  deeply  as  to  be  beyond  disturbance. 

The  motion  for  the  injunction  should  therefore  prevail. 

QUESTIONS 

1.  The  D  Company  is  incorporated  with  a  capital  stock  of  $100,000.    The 
directors  with  the  assent  of  a  majority  of  the  stockholders  vote  to  increase 
the  capital  stock  of  the  corporation  to  $200,000.    The  minority  stock- 
holders ask  that  the  corporation  be  enjoined  from  so  doing.    What 
decision  ? 

2.  After  the  D  Company  is  incorporated,  the  legislature  passes  a  law, 
authorizing  corporations  upon  a  vote  of  a  majority  of  their  stockholders, 
to  increase  their  capital  stock.    The  directors  and  majority  stockholders 
of  the  D  Company  are  proceeding  to  take  advantage  of  the  law  in  ques- 
tion.   The  minority  stockholders  ask  that  the  corporation  be  enjoined 
from  so  doing.    What  decision  ? 

3.  The  directors  of  the  corporation  with  the  assent  of  a  majority  of  the 
stockholders  vote  to  increase  the  capital  stock  of  the  corporation.    The 
minority  stockholders  ask  that  the  corporation  be  enjoined  from  doing 
so.    What  decision  ? 

4.  In  what  way  or  ways  may  the  capital  of  a  partnership  be  increased  or 
decreased  ? 


FINANCING  THE  BUSINESS  UNIT  377 

BURRAL  v.  THE  BUSHWICK  RAILROAD  COMPANY 

75  New  York  Reports  211  (1878) 

FOLGER,  J.  This  is  an  action  in  which  a  judgment  is  asked 
against  a  business  corporation,  that  it  issue  and  deliver  ten  shares 
of  its  capital  stock  to  the  plaintiff,  in  accordance  with  a  certificate 
set  forth  in  the  complaint;  and  pay  to  him  the  interest  on  the  value 
of  the  same,  to-wit;  $1,000,  from  March  28, 1868.  It  is  further  asked, 
that  if  the  corporation  fails  so  to  do,  the  plaintiff  may  have  judgment 
against  it,  for  $1,000,  with  interest  from  the  date  above  named- 
There  is  also  the  prayer  for  alternative  relief. 

The  defendant  has  demurred  to  the  complaint,  and  assigns  as 
cause  of  demurrer  that  it  does  not  state  facts  sufficient  to  constitute 
a  cause  of  action. 

It  is  plain  that  there  is  no  act  averred,  on  which  a  cause  of  action 
arises,  for  the  payment  of  interest  on  the  sum  of  $1,000  from  March  28, 
1868;  or  on  any  sum,  for  any  length  of  time.  No  averment  is  found, 
in  the  allegations  of  the  complaint,  that  the  shares  of  stock  are  of 
any  value.  True,  in  the  prayer  for  judgment,  it  is  said,  "upon  the 
value  of  the  same,  to-wit,  interest  on  the  sum  of  $1,000";  but  that 
is  not  an  averment  of  value.  True  also,  in  the  copy  of  certificate  of 
stock,  set  forth  in  the  complaint,  there  are  the  character  and  figures 
" $1,000 ";  but  they  do  not  make  an  averment  of  value;  nor  is  there 
any  averment,  that  there  was  a  duty  or  obligation  on  the  part  of  the 
defendant  to  pay  interest;  nor  is  any  fact  averred,  from  which  such 
duty  or  obligation  can  appear,  or  be  inferred.  Nor  is  there  any 
allegation  which  will  sustain  an  action  to  recover  $1,000  and  interest 
thereon,  in  case  the  defendant  fails  to  issue  and  deliver  the  stock; 
for,  as  has  been  said,  there  is  no  allegation  that  the  stock  was  at  any 
time  of  any  value.  The  complaint  and  its  averments  are  reduced, 
then,  to  a  cause  of  action  to  compel  the  issuing  and  delivery  of  shares 
of  stock.  If  there  be  a  strict  interpretation  put  upon  the  phrases 
in  the  complaint,  viz.,  "shares  of  capital  stock,"  "stock  herein 
named,"  "the  stock,"  "said  stock,"  there  is  no  allegation  in  the 
complaint,  sufficient  to  sustain  an  action  to  compel  the  issue  and 
delivery  of  those  shares.  The  phraseology  of  the  complaint  has  been 
used  in  this  particular,  with  an  inexact  notion  of  what  is  the  capital 
stock  of  a  business  corporation,  and  what  are  the  shares  of  that 
stock;  though  it  would  seem  to  be  a  matter,  that  at  this  day  should 
be  well  understood.  A  corporation  cannot  issue  and  deliver  a  share 


378  LAW  AND  BUSINESS 

of  its  capital  stock.  By  joint  action  of  the  corporation  and  the 
subscriber  for  its  stock,  he  may  become  the  owner  of  a  given  number 
of  shares  thereof,  but  not  in  such  sense  as  that  he  may  take  away 
those  shares  out  of  the  common  corporate  fund.  The  capital  stock 
is  that  money  or  property,  which  is  put  into  a  single  corporate  fund, 
by  those  who  by  subscription,  therefore,  become  members  of  the 
corporate  body.  That  fund  becomes  the  property  of  the  aggregate 
body  only.  A  share  of  the  capital  stock  is  the  right  to  partake, 
according  to  the  amount  put  into  the  fund,  of  the  surplus  profits  of 
the  corporation,  and  ultimately  on  the  dissolution  of  it,  of  so  much 
of  the  fund  thus  created,  as  remains  unimpaired,  and  is  not  liable  for 
debts  of  the  corporation.  Such  a  right  may  be  created  as  above 
stated.  But  such  a  right,  that  is,  such  a  share,  cannot  be  issued  and 
delivered  by  a  corporation,  continuing  in  legal  existence,  and  carrying 
on  the  business  for  which  it  was  formed.  A  demand  that  it  deliver 
a  share  of  the  corporate  fund,  is  to  ask  of  it  something  which  it  has 
not  the  power  to  do;  and  which  it  will  not  be  compelled  to  do,  by 
judgment;  that  is  to  say,  upon  the  state  of  facts  set  up  in  this  com- 
plaint. It  cannot  take  from  the  capital  stock,  the  corporate  fund, 
a  part  or  parts  thereof  equal  in  number  to  the  shares  or  rights  therein, 
claimed  by  the  plaintiff,  and  hand  those  parts  to  him;  nor  can  it, 
on  the  facts  shown  by  the  complaint,  now  create  the  right  which 
those  shares  represent.  Those  shares  are  intangible,  and  rest  in 
abstract  legal  contemplation.  It  has  been  said,  that  they  are  not  a 
species  of  property  that  can  be  transferred  by  delivery;  and  that  the 
assent  of  the  owner  to  part  with  it  must  be  expressed  in  writing. 
(Davis  v.  Bank  of  England,  2  Bing.  393;  Dunn  v.  Com.  Bank  of 
Buffalo,  ii  Barb.  580.)  It  is  not  needful  that  we  say  in  this  case, 
that  the  rule  goes  to  that  extent;  the  saying  is  cited  to  point  our 
remark,  that  the  share  itself  cannot  be  issued  and  delivered  as  a 
physical  act,  which  is  what  the  prayer  for  judgment  literally  taken 
asks  for.  What  the  corporation  can  do  and  what  in  some  circum- 
stances it  is  compellable  to  do,  is  to  issue  and  deliver  the  written  evi- 
dence of  the  existence  of  such  shares,  and  of  the  ownership  of  a  paper 
usually  called  a  stock  certificate.  It  is  true  that  the  paper  set  forth  in 
the  complaint,  as  issued  by  the  defendant,  declares  that  Charles  Foster 
is  entitled  to  ten  shares  of  its  capital  stock,  on  the  surrender  of  that 
paper.  It  is  possible,  that  the  paper  was  not  meant  to  be  what  we 
have  called  a  stock  certificate,  but  an  evidence  that  Foster  had 
subscribed  for  capital  stock,  and  paid  in  the  amount,  and  that  he  was 


FINANCING  THE  BUSINESS  UNIT  379 

entitled  on  the  surrender  of  it  to  a  stock  certificate.  Even  then  it  is 
inexact,  for  by  the  subscription  and  payment  the  shares  were  created, 
and  he  became  the  owner,  and  entitled  to  all  the  rights  attainable 
thereby,  and  it  did  not  need  that  he  surrender  the  paper  to  become 
so  entitled.  In  rigidity  of  interpretation  then,  the  complaint  shows 
no  state  of  facts,  which  entitled  either  Foster  or  the  plaintiff  to  the 
issue  and  delivery  of  ten  shares  of  the  capital  stock  of  the  defendant, 
which  is  the  judgment  asked  for.  We  think,  however,  that  it  may 
be  safely  held  for  the  purposes  of  this  case,  that  the  paper  is  the 
evidence  of  the  right  of  Charles  Foster  to  ten  shares  of  stock,  as  we 
have  defined  them;  and  that  the  averments  of  the  complaint  and  the 
prayer  for  judgment  were  for  the  issuing  and  delivery  to  the  plain  tiff. 
of  some  instrument  which  will  be  an  evidence  and  a  muniment  to 
him,  of  an  assigned  right  to  those  shares.  Cases  may  exist,  where 
the  owner  of  such  a  right  can  compel  the  corporation  in  whose  capital 
stock  it  exists,  to  issue  to  him  that  evidence.  And  we  have  seen  that 
the  cause  of  action  which  the  facts  of  this  complaint  show,  if  they 
show  any,  is  only  this.  To  constitute  this  cause  of  action,  they 
must  show  the  plaintiff  to  be,  first,  the  owner  of  that  paper  and  of  the 
right  which  it  evidences;  and,  second,  that  the  defendant  has  unjustly 
refused  to  take  from  him  a  surrender  of  the  paper,  and  issue  to  him 
a  new  certificate. 

We  are  of  the  mind,  that  in  any  view  in  which  the  case  can  be 
looked  at  that  the  complaint  is  too  meager  in  its  statement  of  facts, 
to  show  a  cause  of  action  in  the  plaintiff.  There  are  some  other 
considerations,  which  were  urged  upon  us  by  the  respondent,  but  they 
need  not  be  considered. 

The  judgment  for  the  defendant  should  be  affirmed;  and  the 
plaintiff  have  leave  to  amend  on  payment  of  costs. 

QUESTIONS 

1.  What  was  the  nature  of  the  plaintiff's  claim  in  this  case?    Upon  what 
theory  did  he  make  this  claim  ? 

2.  What  is  a  share  of  stock  in  a  corporation?    Is  it  tangible  or  intangible 
property  ?     Is  it  real  or  personal  property  ? 

3.  S  owns  ten  shares  of  stock  in  a  certain  corporation.    T  steals  his  certifi- 
cate of  stock.    What  are  the  rights  of  S  against  T  ? 

4.  What  functions  does  stock  perform  in  financing  a  corporate  business? 
Why  is  ownership  in  a  partnership  not  divided  into  shares  of  stock  ? 

5.  What  is  meant  by  treasury  stock  ?    How  can  there  be  such  a  thing  as 
treasury  stock  ? 


380  LAW  AND  BUSINESS 

6.  In  some  states  laws  have  been  passed  authorizing  the  issue  of  shares  of 
stock  without  par  value.  What  can  be  said  for  and  against  stock 
without  par  value  ? 


NORTHERN  TRUST  COMPANY  v.  COLUMBIA 
STRAW-PAPER  COMPANY 

75  Federal  Reporter  936  (1896) 

Bill  by  the  Northern  Trust  Co.  and  another  against  the  Columbia 
Straw-Paper  Co.  and  others.  On  exceptions  by  one  Dickerman  and 
others  to  the  master's  report. 

Bonds  were  issued  by  the  Columbia  Straw-Paper  Co.  under  a 
deed  of  trust  made  to  the  Northern  Trust  Co.  and  another,  and  were 
delivered  by  the  company,  together  with  a  large  quantity  of  its  stock, 
to  one  Stein,  in  exchange  for  certain  mill  plants  and  cash.  Stein 
sold  the  bonds  at  their  par  value,  giving  part  of  the  stock  to  the 
purchasers  as  a  bonus.  Thereafter  foreclosure  proceedings  under 
the  mortgage  were  instituted,  and  it  was  sought  by  certain  stock- 
holders to  have  certain  of  the  bondholders  charged  with  amounts 
alleged  to  be  unpaid  on  the  stock  received  by  such  bondholders  as  a 
bonus. 

SHOWALTER,  CIR.  J.  In  this  case  the  defendant  corporation 
contracted  with  Stein,  whereby,  for  certain  specified  properties, 
which  he  caused  to  be  transferred  to  that  company,  all  or  nearly  all 
of  the  stock  of  the  company  was  exchanged.  Stein  afterward  delivered 
or  caused  to  be  delivered,  it  is  said,  a  large  portion  of  this  stock  to 
third  parties.  There  was  no  express  agreement  by  these  parties  to 
pay  anything  to  the  Columbia  Straw-Paper  Company  in  the  way 
of  a  stock  subscription.  If  the  complaint  of  these  defendants  be  well 
founded  it  would  simply  mean  either  that  the  stock  should  be  turned 
back  to  Stein  or  to  the  company  for  their  benefit,  or  treated  as  void. 
There  is  no  basis  in  this  case  for  any  ruling  that  the  holders  of  the 
stock  referred  to  sustained  the  relation  of  debtor  to  the  Columbia 
Straw-Paper  Co.  for  the  price  of  that  stock.  This  is  not  a  case 
where  a  stock  liability  was  incurred  by  certain  persons,  and  afterward 
gotten  rid  of  in  some  way  without  payment.  It  might  be  possible 
to  say  in  this  case  that  certain  of  the  persons  to  whom  Stein  delivered 
the  stock  were  not  entitled  to  it,  as  against  the  rights  of  other  persons 
to  whom  he  delivered  other  portions  of  stock,  but  there  is  no  basis 
here  for  declaring  an  indebtedness  by  these  stockholders  to  the 


FINANCING  THE  BUSINESS  UNIT  381 

Columbia  Straw-Paper  Co.  The  Columbia  Straw-Paper  Co.  parted 
with  its  capital  stock  for  what  was  agreed  to  be  the  value  of  that 
stock.  The  property  which  Stein  contracted  to  give,  and  which  he 
did  give,  or  caused  to  be  given,  to  the  Columbia  Straw-Paper  Co., 
was  what  that  company  agreed  to  accept  for  its  stock.  In  that  tran- 
saction the  Columbia  Straw-Paper  Co.  was  in  no  way  wronged. 
It  can  have  no  action  to  recover  on  the  theory  that  the  stock  has  not 
been  paid  for,  nor  can  any  discontented  stockholder  assert  such  a 
right  for  the  Columbia  Straw-Paper  Co.  as  against  any  other  stock- 
holder. A  quarrel  between  stockholders  concerning  the  beneficial 
ownership  of  stock  which  has  been  paid  for,  is  one  thing.  A  contro- 
versy between  a  corporation  and  a  stockholder  who  has  not  paid 
such  corporation  what  is  due  from  him  for  his  stock,  is  another. 
The  case  might  be  different  here  if  the  rights  of  creditors  were  involved. 
I  do  not  say  that  it  would  be,  but  under  the  decisions  of  some  courts 
it  might  be. 

It  is  strongly  urged  here  that  the  property  which  the  company 
got  for  its  stock  under  the  Stein  contract  was  not  a  fair  equivalent 
for  the  stock,  estimating  the  latter  at  its  par  value.  As  the  case  turned 
out  and  in  the  light  of  what  happened,  this  position  is  doubtless  correct; 
but  when  the  contract  was  made,  and  in  view  of  the  enterprise  then 
in  contemplation,  I  am  not  prepared  to  say  that  the  estimate  put 
upon  the  property  by  these  parties  was  so  far  out  of  the  way.  The 
important  point,  as  the  case  arises  here,  is  this:  Whatever  may  have 
been  in  fact  the  value  of  the  property  turned  over  to  the  company 
for  its  stock  the  company  agreed  to  take  it  for  the  stock.  The  persons 
interested  were  the  stockholders,  and  there  was  no  dissent  on  the  part 
of  any  person  concerned  from  what  was  then  done.  Neither  any 
person  then  holding  stock,  nor  any  person  who  afterward  became  a 
stockholder  by  assignment  from  one  who  then  held  stock,  can  now 
make  complaint,  on  behalf  of  the  corporation,  as  against  the  fairness 
of  that  transaction.  This  I  take  to  be  the  settled  law  on  that  subject. 

Much  has  been  said  in  the  course  of  the  argument  about  looking 
through  forms  and  going  to  the  substance  of  what  was  done.  The 
corporation  sold  its  stock  for  a  price  which  everybody  interested 
at  that  time  agreed  to,  and  no  harm  was  done,  or  wrong  committed, 
either  in  law  or  morals.  Apart  from  all  the  forms  adopted  by  these 
parties  in  transacting  the  business,  what  the  whole  thing  amounts 
to  is  about  this:  The  owners  of  the  mills,  we  will  say,  wanted  addi- 
tional capital  to  carry  on  their  business  and  desired  certain  capitalists 


382  LAW  AND  BUSINESS 

to  join  with  them  and  become  interested.  These  capitalists  did  so, 
and  furnished  $1,000,000,  upon  the  understanding  that  a  certain 
managing  agent  should  take  the  legal  ownership  of  the  mills,  and  that 
the  business  should  be  continued  and  carried  on,  and  that  they  should 
have,  as  against  the  mill  owners,  a  lien  for  the  repayment  of  that 
money  upon  the  mills  themselves.  After  a  time  the  business  failed. 
The  persons  who  furnished  the  money  simply  insist  upon  an  enforce- 
ment of  the  lien.  The  cash  was  advanced  upon  this  understanding, 
and  there  is  no  offer  by  the  mill  owners  to  return  it.  I  cannot  see 
how  a  foreclosure  of  the  mortgage  could  be  prevented,  on  the  state 
of  facts  here.  Even  if  the  circumstances  were  such  as  to  entitle  the 
mill  owners  to  repudiate  the  contract,  a  tender  back  of  the  money 
received  by  them  as  part  payment  for  the  mills  would  be  a  necessary 
condition.  As  the  case  stands,  I  do  not  see  how  a  foreclosure  can  be 
resisted,  or  how  any  set-off,  as  insisted  on,  is  valid,  or  can  be  held  good. 
I  think  the  exceptions  to  the  master's  report  should  be  overruled. 

QUESTIONS 

1.  The  P  Company  issued  one  hundred  shares  of  its  stock  to  D  as  a  bonus. 
Subsequently,  the  corporation  brought  proceedings  to  have  the  stock 
canceled.    What  decision  ? 

2.  A,  B,  and  C,  minority  stockholders,  voted  against  the  issuance  of  the 
bonus  stock.    They  brought  proceedings  to  have  the  stock  canceled. 
What  decision  ? 

3.  All  of  the  stockholders  assent  to  the  issue.    S  sells  his  stock  to  X. 
P   brought   proceedings   to   have   the   bonus   stock   canceled.    What 
decision  ? 

4.  What  is  the  effect  of  "watered"  or  "fictitiously  paid  up  stock"  as 
against  creditors  of  the  corporation  ? 

5.  In  many  states  it  is  provided  by  statute  that  a  private  corporation 
shall  not  issue  stock  except  for  money  or  property  actually  received  or 
labor  actually  performed.    For  whose  protection  are  such  laws  passed  ? 
What  is  the  effect  of  stock  issued  in  violation  of  such  provisions  ? 

JACOB  SPANGLER  v.  THE  INDIANA  AND  ILLINOIS 
CENTRAL  RAILWAY  COMPANY 

21  Illinois  Reports  275  (1859) 

This  judgment  was  pronounced  upon  a  subscription  to  stock, 
reciting  that,  "We,  the  undersigned,  promise  to  pay  to  the  Indiana 
and  Illinois  Central  Railway  Company,  fifty  dollars  for  each  share  of 


FINANCING  THE  BUSINESS  UNIT  383 

capital  stock  set  opposite  to  our  names,  in  such  manner  and  propor- 
tion, and  at  such  times  as  the  directors  of  said  company  may  order 
and  direct,  without  any  relief  whatever  from  valuation  or  appraise- 
ment laws."  The  pleadings  in  the  case  are  stated  in  the  opinion  of 
Mr.  JUSTICE  BREESE. 

On  the  overruling  of  the  demurrer  to  the  first  and  second  counts 
of  the  declaration,  the  plaintiff  below  entered  a  nolle  prosequi  on  the 
common  counts,  and  the  court  gave  him  judgment  for  $1,250 — amount 
of  subscription  for  twenty-five  shares  of  stock. 

The  defendant  below  sued  out  this  writ  of  error,  and  assigned 
for  errors,  the  overruling  of  the  demurrer  to  the  first  and  second  counts 
of  the  declaration,  and  the  rendering  of  final  judgment  for  the  plaintiff. 

BREESE,  J.  The  first  objection  is,  that  the  declaration  is  insuf- 
ficient. It  is  urged  that  the  declaration  should  have  averred  by  what 
law,  or  laws,  the  plaintiff  existed  as  a  corporation — that  the  mere 
statement  that  the  plaintiff  was  a  corporation,  is  not  sufficient. 

There  is  no  ground  for  this  objection.  There  is  an  averment 
that  the  plaintiff  at  the  time,  etc.,  was,  and  still  is,  a  body  corporate 
and  politic,  " created  under  the  name  and  style  aforesaid." 

By  demurring,  the  defendant  admits  the  fact  as  averred.  If  he 
would  deny  the  existence  of  such  a  corporation,  he  should  have  put 
in  a  plea  for  that  purpose,  either  in  abatement  or  in  bar.  The  Society 
for  the  Propagation  of  the  Gospel  v.  The  Town  of  Pawlet  and  Ozias 
Clark,  4  Peters  R.  480;  Mclntire  v.  Preston,  5  Gilm.  R.  58,  and  cases 
there  cited. 

Another  objection  is,  that  the  declaration  does  not  aver  that  the 
board  of  directors  had  ordered  ten  instalments  of  10  per  cent  each, 
on  every  share  subscribed,  amounting  to  the  defendant's  full  subscrip- 
tion, and  had  given  the  defendant  notice  of  it,  nor  does  it  aver  the 
time  and  place  when  and  where  the  order  of  assessment  was  made, 
and  the  particular  amount  of  each  assessment. 

We  have  decided  (Barret  v.  The  Alton  6°  Sangamon  Railroad  Co., 
13  111.  R.  504),  that  where  the  power  to  require  payment  from 
subscribers  to  stock  is  vested  in  a  board  of  directors,  an  action  will 
not  lie  to  recover  instalments  until  the  board  has  directed  the  call  to 
be  made,  and  due  notice  of  the  amount,  and  the  time  and  place  of 
payment  have  been  given,  the  subscribers  being  in  no  default  until 
these  requirements  of  the  charter  have  been  performed. 

The  undertaking  of  the  defendant  is,  to  pay  to  the  company  $50 
for  each  share  of  capital  stock  subscribed,  in  such  manner  and  propor- 


384  LAW  AND  BUSINESS 

tion,  and  at  such  times  as  the  directors  of  the  company  may  order  and 
direct.  The  averment  is,  that  "  before  bringing  the  suit,  the  defend- 
ant, by  the  directors  of  said  body  corporate  and  politic,  was  duly 
required  and  notified  to  pay  the  company,  as  instalments  on  his 
subscription  of  stock,  ten  assessments  of  10  per  cent  each,  amounting 
in  the  whole  to  the  sum  of  $1,250,  and  being  the  amount  in  jull  of 
stock  subscribed  by  the  defendant,  and  the  same  was  personally 
demanded  of  him." 

In  the  second  count  it  is  averred,  that  ten  instalments  of  10  per 
cent  each,  amounting  to  $1,250,  due  on  the  stock  by  defendant,  had 
been  called  for  by  the  board  of  directors  of  the  corporation,  of  which 
the  defendant  then  and  there  had,  and  at  all  times  had,  due  notice. 

The  third  and  last  count  avers,  that  the  defendant  was  indebted 
to  the  plain  tiff  in  the  sum  of  $1,250,  for  and  in  respect  of  twenty-five 
shares  of  stock  duly  subscribed  by  him,  and  which  he  held  in  the 
company,  by  virtue  of  divers  calls  on  him,  duly  made  before  them 
by  the  directors  for  the  time  being  of  the  company,  and  being  so 
indebted,  he  undertook  and  promised. 

To  say  nothing  of  the  very  loose  and  inartificial  manner  in  which 
this  declaration  was  drawn,  we  think  it  does  not  contain  the  substance 
of  a  good  declaration  in  such  a  case  on  the  contract  set  forth.  The 
contract  must  have  been  understood  by  both  parties  to  be,  that  the 
board  of  directors  would  make,  periodically,  certain  assessments 
on  the  stock  subscribed,  of  which  the  subscribers  would  be  duly 
notified.  It  could  not  have  been  in  the  contemplation  of  the  defend- 
ant, or  any  subscriber,  that  he  could  be  called  upon  to  pay  the  whole 
amount  of  his  subscription  at  one  time,  without  notice  of  previous 
assessments.  This  contract,  like  all  others,  must  be  construed 
according  to  the  intention  of  the  parties  as  manifested  by  the  language 
used,  and  the  object  contemplated.  By  this  contract,  the  defendant 
was  to  pay  his  subscription  in  certain  proportions.  A  call  upon  him 
for  the  whole  at  once,  is  not  justified  by  the  contract.  A  demand 
for  the  whole  might  be  justified  if  there  had  been  regular  periodical 
assessments,  and  the  defendant  duly  notified  of  them.  On  failing 
to  pay  them,  an  action  would  lie  for  the  whole  amount.  It  is  indis- 
pensable that  assessments  should  have  been  made  by  an  order  of  the 
board  of  directors,  and  the  subscribers  duly  notified.  Barret  v. 
Alton  &•  Sangamon  Railroad  Co.,  ante.  Assessments,  as  understood 
in  such  contracts,  mean  a  rating  or  fixing  of  the  proportion,  by  the 


FINANCING  THE  BUSINESS  UNIT  385 

board  of  directors,  which  every  subscriber  is  to  pay  of  his  subscription, 
when  notified  of  it,  and  when  called  on.  There  is  no  averment  in 
any  one  count  of  this  declaration,  that  any  assessment  was  made,  such 
as  was  contemplated,  of  which  the  defendant  had  any  notice.  —He 
cannot  be  required  to  pay  the  whole  amount  of  his  subscription  until 
its  several  proportions  have  been  called  for  and  refused.  For  this 
reason  the  demurrer  should  have  been  sustained.  It  is  proper,  in 
such  cases,  the  subscription  being  the  equivalent  of  an  instrument 
of  writing  for  the  payment  of  money  only,  that  the  court,  by  the 
clerk,  should  assess  the  damages  the  same  as  in  case  of  a  default, 
unless  leave  is  asked  and  given  to  withdraw  the  demurrer  and  plead 
to  issue. 

The  judgment  of  the  circuit  court  overruling  the  demurrer  is 
reversed,  and  the  cause  remanded,  with  leave  to  the  plaintiff  to  amend 
the  declaration. 

Judgment  reversed. 


QUESTIONS 

1.  D  subscribes  for  ten  shares  of  stock  in  the  P  Company  to  be  paid  for 
thirty  days  after  the  issuance  of  the  stock.    Thirty  days  after  the 
issuance  of  the  stock  the  company  brings  an  action  against  D  for  the 
price  of  his  stock.    What  decision  ? 

2.  S  subscribes  for  stock  in  the  P  Company  to  be  paid  for  as  may  be  required 
by  the  directors  of  the  corporation.     The  company  without  making  any 
assessment  brings  an  action  against  D  for  the  price  of  his  stock.    What 
decision  ? 

3.  In  cases  where  calls  are  necessary,  by  whom  must  they  be  made  ?    How 
must  they  be  made  ? 

4.  D  purchases  stock   of  the  P   Company  and  pays  par  value  in  cash 
for  them.     The  directors  of  the  corporation,  to  meet  a  financial  emer- 
gency, subsequently  vote   to   assess  each  member  of  the  corporation 
10  per  cent  of  the  par  value  of  the  stock  held  by  him.    This  is  an 
action  by  the  company  against  D  for  the  assessment  on  his  stock.    What 
decision  ? 

5.  S  purchases  ten  shares  of  stock  in  the  D  Company,  which  he  agrees  to 
pay  for  in  thirty  days.     In  what  way  can  the  corporation  enforce  pay- 
ment against  S  after  the  expiration  of  thirty  days  ? 

6.  S,  -before  he  has  paid  for  his  stock,  transfers  it  to  B,  who  pays  value  for 
it  but  with  knowledge  that  S  has  not  paid  for  it.     What  are  the  rights 
of  the  corporation,  if  any,  against  B  ? 


386  LAW  AND  BUSINESS 

2.     Devices  for  Raising  Capital 
HUDSON  REAL  ESTATE  COMPANY  v.  TOWER 

156  Massachusetts  Reports  82  (1892) 

Contract  to  recover  the  amount  of  a  subscription  by  the  defend- 
ants, who  were  copartners,  toward  the  erection  of  a  factory.  At  the 
trial  in  the  superior  court  it  appeared  that  the  defendants  signed  the 
subscription  paper  in  question.  In  defense  they  offered  to  show 
that  one  Harriman,  as  a  solicitor  of  subscriptions  for  the  capital 
stock  of  the  corporation,  which  was  to  be  formed  at  some  time  after 
the  subscription  was  made,  asked  the  defendant  Herman  C.  Tower  to 
subscribe;  that,  in  the  course  of  conversation  relative  to  the  matter 
of  subscribing,  Tower  said  that  if  the  subscribers  were  going  to 
mortgage  the  property  to  be  bought  with  the  subscriptions  his  sub- 
scription would  be  merely  nominal,  but  that  if  they  would  raise  the 
full  amount  by  subscription,  and  not  mortgage  the  property,  he 
would  subscribe  for  ten  shares,  or  $500  worth;  that  Harriman  there- 
upon asked  him  to  subscribe  with  that  understanding,  but  he  declined 
to  do  it  that  day;  that,  the  doctor  urging  again  that  he  should 
subscribe  upon  that  understanding,  Tower  said  that  he  would  put 
down  his  name  if  it  was  understood  between  them  that  that  was  the 
condition  of  his  subscription,  and  upon  this  assurance  from  Harriman 
he  did  subscribe  at  the  time  for  that  amount;  that  thereafter  Harri- 
man reported  to  the  meeting  of  the  subscribers  the  condition  of  the 
defendant's  subscription,  and  that  in  consequence  of  that  report  the 
meeting  voted  "that  there  shall  be  no  mortgage  on  the  property"; 
that  thereafter,  and  before  anything  was  done  by  the  subscribers, 
one  of  their  number,  then  active  in  their  affairs  and  now  president 
of  the  corporation,  informed  Tower,  the  defendant,  that  they  intended 
to  rescind  the  vote  whereby  they  voted  not  to  mortgage;  that  there- 
upon the  defendant  Tower  told  this  gentleman  that  if  they  so  voted 
he  would  not  pay  a  penny  of  his  subscription;  that  this  information 
had  come  to  the  ears  of  a  number  of  the  subscribers;  that  thereafter, 
namely,  upon  the  thirty-first  of  August,  1889,  they  voted  "that  the 
vote  whereby  we  voted  August  14,  1889,  not  to  place  a  mortgage 
on  the  property  be  rescinded";  that  thereafter  the  subscribers 
formed  a  corporation,  and  the  corporation  did  on  the  first  day  of 
April,  1890,  place  a  mortgage  for  $17,000  upon  said  property  in 
consequence  of  a  legal  and  proper  vote  so  to  do.  The  defendants 
further  offered  to  show  that  nothing  had  been  done  by  the  subscribers 


FINANCING  THE  BUSINESS  UNIT  387 

in  consequence  of  said  subscriptions  before  said  revocation  by  defend- 
ants. 

The  court  ruled  that  this  would  not  constitute  a  defense  and 
direct  a  verdict  for  the  plaintiff;  and  the  defendants  alleged  excep- 
tions. 

ALLEN,  J.  At  the  time  when  the  defendant  signed  the  subscrip- 
tion paper  declared  on  it  was  not  a  contract,  for  want  of  a  contracting 
party  on  the  other  side;  but  it  has  now  been  established  that  a 
subscription  of  this  sort  becomes  a  contract  with  the  corporation  when 
the  corporation  has  been  organized,  and  in  this  way  the  objection 
of  the  want  of  a  proper  contracting  party  is  finally  avoided,  provided 
everything  goes  on  as  contemplated,  without  any  interruption.  Until 
the  organization  of  the  corporation,  the  subscription  is  a  mere  proposi- 
tion or  offer,  which  may  be  withdrawn,  like  any  other  unaccepted 
offer.  Unless  the  signer  is  bound  upon  a  contract,  he  is  not  bound 
at  all.  It  is  open  to  him  to  withdraw.  It  is  not  on  the  ground 
that  there  was  no  sufficient  consideration.  The  seal  would  do  away 
with  any  doubt  on  that  score.  But  it  is  on  the  ground  that  for  the 
time  being,  and  until  the  corporation  is  organized,  the  writing  does 
not  take  effect  as  a  contract,  because  the  contemplated  party  to  the 
contract,  on  the  other  side,  is  not  yet  in  existence,  and  for  this  reason, 
there  being  no  contract,  the  whole  undertaking  is  inchoate  and 
incomplete;  and,  since  there  is  no  contract,  the  party  may  withdraw. 
Music  Hall  Co.  v.  Carey,  116  Mass.  471;  Ives  v.  Sterling,  6  Mete. 
310;  Thompson  v.  Page,  i  Mete.  565;  Academy  v.  Davis,  n  Mass. 
113;  Phipps  v.  Jones,  20  Pa.  260. 

In  the  present  case  there  was  evidence  which  would  warrant  a 
rinding  that  the  defendant  thus  withdrew  before  the  time  came  when 
his  subscription  would  have  become  a  contract.  Exceptions  sustained. 

QUESTIONS 

1.  D  signed  the  following  subscription  paper:    "For  and  in  consideration 
of  the  promises  of  each  other,  we  and  each  of  us  agree  to  subscribe  for 
stock  in  the  P  Company  in  the  amounts  set  opposite  our  names."    Before 
the  corporation  came  into  existence,  D  notified  the  other  signers  of  the 
list  that  he  did  not  intend  to  subscribe  for  any  stock  in  the  corporation. 
The  corporation  when  organized  tenders  stock  to  D  and  sues  him  for 
his  refusal  to  accept  it.    What  decision  ? 

2.  In  the  foregoing  case,  S,  one  of  the  signers  of  the  subscription  list,  sues 
D  for  his  refusal  to  accept  the  stock  tendered  to  him.    What  decision  ? 


388  LAW  AND  BUSINESS 

3.  When  the  corporation  comes  into  existence  it  refuses  to  issue  stock  to 
D.    D  sues  the  corporation  for  damages.    What  decision  ? 

4.  General  incorporating  laws  usually  provide  for  the  opening  of  subscrip- 
tion books  and  the  taking  of  preliminary  subscriptions  as  a  step  in 
incorporation.    D  signs  such  a  subscription  list  agreeing  to  take  ten 
shares  of  stock  in  a  certain  corporation  to  be  organized.    Before  the 
corporation  comes  into  existence  he  announces  his  intention  not  to  take 
the  stock  subscribed  for.    The  corporation  brings  this  action  against 
him  for  his  refusal  to  take  the  stock.    What  decision  ? 

5.  What  are  the  essential  requirements  of  a  contract  to  subscribe  for  stock 
in  a  corporation  to  be  organized  ? 

THRASHER  v  PIKE  COUNTY  RAILROAD  COMPANY 

25  Illinois  Reports  393  (1861) 

This  was  an  action  of  assumpsit,  by  the  Pike  County  Railroad 
Co.  against  Charles  Thrasher,  upon  an  agreement  to  subscribe  for 
stock  in  the  plaintiff  corporation.  A  jury  was  waived  and  a  trial 
had  by  the  court,  who  found  the  issues  for  the  plaintiff,  and,  refusing 
a  motion  for  a  new  trial,  rendered  judgment  against  the  defendant 
for  $3,000  and  costs. 

BREESE,  J.  The  appellee,  who  was  plaintiff  in  the  court  below, 
urges  several  reasons  justifying  a  recovery  in  this  case,  which  it  is 
necessary  to  notice.  The  declaration  contains  a  special  count,  aver- 
ring, that  on  the  nineteenth  of  March,  1856,  the  plaintiffs  were  a 
body  politic  and  corporate,  with  power  to  construct  and  operate  a 
railroad  within  the  county  of  Pike,  and  authorized  by  law,  as  such 
corporation,  to  secure  subscriptions  to  the  capital  stock  of  the  com- 
pany to  the  amount  of  one  million  of  dollars,  in  shares  of  one  hundred 
dollars  each,  and,  desiring  to  ascertain  what  amount  of  stock  would 
be  subscribed,  and  not  having  opened  regular  subscription  books, 
but  intending  so  to  do,  agreed  with  the  defendant  that  they  would, 
in  a  reasonable  time  thereafter,  open  books  for  the  purpose  of  securing 
such  subscriptions,  and  that  they  would  permit  and  allow  the  defend- 
ant, when  the  books  should  be  opened,  to  subscribe  to  the  capital 
stock  of  the  company  thirty  shares  of  one  hundred  dollars  each, 
and  upon  payment  therefor,  the  defendant  should  be  the  owner  of 
thirty  shares  of  the  capital  stock  of  the  company.  It  is  then  averred, 
that  the  defendant,  in  consideration  of  this  promise,  undertook  and 
promised  the  plaintiff  that  he  would  subscribe  to  the  stock  of  this 
company  the  sum  of  three  thousand  dollars,  when  the  books  should 


FINANCING  THE  BUSINESS  UNIT  389 

be  opened  for  subscription;  that  this  promise  was  by  a  writing, 
signed  by  the  defendant,  and  by  him  delivered  to  the  plaintiff.  It  is 
then  averred,  that  on  the  same  day,  subscription  books  to  the  capital 
stock  of  the  company  were  opened,  of  which  the  defendant  had  rmtiee. 
The  breach  is,  that  the  defendant  neglected  and  refused  to  subscribe 
anything  to  the  capital- stock,  accompanied  by  an  averment  that  the 
subscription,  when  the  books  were  opened,  was  due  and  payable  before 
the  commencement  of  the  suit,  and  although  notified  thereof,  the 
defendant  has  refused  to  pay  any  part  of  the  sum  of  three  thousand 
dollars.  The  common  counts  are  added,  in  one  of  which  the  indebted- 
ness is  alleged  to  be  for  one  hundred  shares  of  the  stock  of  the  Pike 
County  Railroad,  before  that  time  bargained  and  sold  to  the  defend- 
ant. 

This  is  the  cause  of  action  as  set  forth  by  the  plaintiffs,  and  it  is 
claimed  by  them,  that  they  are  entitled  to  recover  as  damages  the  par 
value  of  the  stock,  or  the  amount  of  calls  made  from  time  to  time  upon 
it,  and  which,  at  the  commencement  of  the  suit,  amounted  to  fourteen 
instalments,  of  5  per  cent  each,  making,  in  all,  twenty-one  hundred 
dollars. 

This,  we  do  not  think,  is  a  fair  view  of  the  defendant's  liability 
upon  his  promise,  if  one  was  made  to  the  plaintiff.  His  undertaking 
is,  to  subscribe  a  certain  amount  of  stock,  when  the  subscription 
books  should  be  opened.  This  promise  does  not  make  him  a  stock- 
holder, and,  as  such,  liable  to  calls.  The  company  has  parted  with 
no  stock  to  him,  and  can  only  claim  as  damages,  the  actual  loss  sus- 
tained by  them  by  his  failure,  or  refusal  to  subscribe,*  when  he  was 
notified  the  books  were  opened  for  such  purpose.  The  company 
has  the  stock  which  the  defendant  promised  to  take,  but  did  not 
take.  His  promise  is  like  any  other  promise,  or  agreement  to  purchase 
any  specific  article  of  property.  If  the  property  contracted  for  be 
retained  by  the  vendor,  and  there  is  no  delivery  to  the  purchaser, 
or  offer  to  deliver,  the  damages  must  not  be  measured  by  the  value 
of  the  property;  for  it  would  not  be  just,  in  such  cases,  that  the  vendor 
should  retain  the  property,  and  recover,  also,  the  value  of  it  from  the 
promisor.  Some  damage  might  result  from  the  loss  of  a  bargain, 
and  to  such  the  vendor  would  be  entitled,  if  the  extent  could  be 
established.  In  many  cases,  they  would  be  merely  nominal.  On 
an  agreement  for  the  sale  and  purchase  of  stocks,  and  a  refusal  by  the 
purchaser  to  take  the  stocks,  the  measure  of  damages,  ordinarily, 
might  be  the  difference  between  the  par  value  of  the  stocks  and  their 


3QO  LAW  AND  BUSINESS 

market  value,  or  between  them  and  money.  As  well  argued  by  the 
appellant,  the  defendant  having  violated  his  promise  by  failing  to 
subscribe,  he  has  acquired  no  right  to  stock ;  nor  could  a  recovery  in 
this  action  entitle  him  to  become  a  stockholder.  The  company 
retains  its  stock,  and  the  defendant  his  money.  A  stock  certificate 
of  three  thousand  dollars  would  represent  a-  value  to  the  company 
equivalent  to  so  much  money,  and,  in  a  statement  of  their  liabilities, 
this  would  appear  against  the  company  as  so  much  held  by  the 
stockholders,  for  which  the  company  was  responsible.  If  there  is 
no  actual  subscription,  the  company  does  not  incur  this  liability. 

There  being  no  special  damages  alleged,  or  proved,  we  do  not 
think  the  plaintiff  could  recover  under  this  declaration,  as  they  have 
done,  the  par  value  of  the  stock  the  defendant  promised  and  agreed 
to  take.  A  proper  count  might  doubtless  be  so  framed  as  to  justify 
a  full  recovery,  under  sufficient  proof. 

Judgment  reversed. 
QUESTIONS 

1.  What  was  the  issue  under  consideration  in  the  principal  case?    How 
was  the  issue  decided?    What  rule  of  law  can  be  deduced  from  the 
decision  ? 

2.  What  is  the  difference  between  a  contract  to  subscribe  for  stock  in  a 
corporation  and  a  subscription  contract?    What  practical  difference 
does  it  make  whether  a  person's  undertaking  with  the  corporation  is 
the  one  or  the  other  ? 

3.  What  is  the  measure  of  damages  which  the  corporation  is  entitled  to 
recover  when  a  subscriber  refuses  to  accept  stock  for  which  he  has 
contracted  lo  subscribe?    What  recourse  has  a  corporation  when  a 
person  refuses  to  accept  stock  for  which  he  has  subscribed  ? 

4.  What  are  the  essential  requirements  of  a  contract  to  subscribe  to  the 
stock  of  an  existing  corporation  ? 

COLLINGS  v.  ALLEN 
90  New  Jersey  Law  Reports  5  (1917) 

GUMMERE,  C.  J.  This  action  was  brought  by  Collings,  the  trustee 
of  "The  Ottomobile  Co.,"  a  corporation  of  New  Jersey,  adjudicated 
a  bankrupt  by  the  United  States  District  Court,  upon  a  stock  sub- 
scription signed  by  the  defendant,  of  which  the  following  is  a  copy: 

Subscription  to  preferred  stock  of  the  Ottomobile  Company  par  value 
$100  per  share.  September  25th,  1911.  I  hereby  subscribe  to  four  shares 
of  the  par  value  of  $100  per  share  of  the  six  per  cent,  preferred  stock  of  the 
Ottomobile  Company,  a  corporation  to  be  organized  under  the  laws  of  the 


FINANCING  THE  BUSINESS  UNIT  39! 

State  of  New  Jersey  with  an  authorized  capital  of  $250,000,  six  per  cent, 
preferred,  and  $250,000  common  stock,  one  share  of  common  stock  to  be 
given  as  a  bonus  with  each  two  shares  of  preferred.  The  purpose  of  the 
organization  is  to  acquire  the  automobile  interests  of  the  Otto  Gas  Engine 
Works  of  Philadelphia,  and  the  entire  assets  and  good  will  of  the~Ofto 
Motor  Sales  Company  of  Philadelphia.  I  agree  to  pay  for  such  stock  as 
follows:  .... 

and  then  follows  the  dates  and  amounts  of  the  payments. 

The  case  was  tried  before  the  court  without  a  jury,  and  resulted 
in  a  finding  in  favor  of  the  plaintiff  for  the  par  value  of  four  shares 
of  the  preferred  stock,  and  two  shares  of  the  common  stock  of  the 
bankrupt  corporation,  with  interest  upon  the  same  from  the  date  when, 
according  to  the  finding  of  the  court,  the  defendant  was  obligated  to 
take  the  stock.  From  the  judgment  entered  on  this  finding  the 
defendant  appeals. 

The  company  of  which  the  plaintiff  is  the'  representative  was 
organized  under  the  corporation  laws  of  this  state  in  January,  1912: 
The  principal  purposes  of  its  incorporation,  as  set  forth  in  the  certifi- 
cate filed  by  it,  were  to  manufacture  automobiles,  automobile  and 
motor  car  accessories  and  supplies  of  every  class  and  description, 
including  any  and  all  parts  of  vehicles  of  all  kinds,  or  any  other  goods 
pertaining  to  the  automobile  business,  or  otherwise,  which  the 
corporation  may  determine  to  manufacture.  To  buy,  sell,  and  deal 
in  automobiles,  automobile  and  motor  car  accessories  and  supplies 
of  every  class  and  description  as  manufacturers,  agents,  jobbers, 
wholesale  or  retail,  on  commission  or  consignment  or  otherwise,  in- 
cluding any  part  and  all  parts  of  vehicles  of  all  kinds,  or  any  other 
goods  pertaining  to  the  automobile  business,  or  otherwise,  in  which 
the  corporation  may  determine  to  deal.  To  carry  on  the  business 
of  mechanical  engineers,  and  dealers  in  and  manufacturers  of  plants, 
motors,  engines,  and  other  machinery,  implements  rolling  stock,  and 
hardware  of  all  kinds.  To  build,  construct,  and  repair  railroads, 
water,  gas,  and  electric  works,  tunnels,  bridges,  viaducts,  canals, 
hotels,  wharves,  piers,  or  any  like  work  of  internal  improvement, 
public  use,  or  utility.  To  manufacture,  purchase,  or  otherwise  acquire 
goods,  merchandise  and  personal  property  of  every  class,  and  to  hold, 
own,  mortgage,  sell  or  otherwise  dispose  of,  trade,  deal  in  and  deal 
with  the  same.  To  borrow  or  raise  money  without  limit  as  to  amount 
by  the  issue  of,  or  upon,  warrants,  bonds,  debentures,  and  other 
negotiable  or  transferable  instruments,  or  otherwise. 


392  LAW  AND  BUSINESS 

Other  purposes  are  also  specified  in  the  certificate  of  incorporation; 
we  do  not  find  it  necessary,  however,  to  recite  them.  It  is  enough  to 
say  that  the  purposes  for  which  the  bankrupt  corporation  was  organ- 
ized are  not  only  far  different  from,  and  far  more  comprehensive, 
than  those  for  which  the  proposed  company  referred  to  in  the  defend- 
ant's subscription  contract  was  to  be  organized,  but  that  they  do  not 
any  of  them  necessarily  embrace  either  of  the  two  purposes  expressed 
in  that  contract,  namely,  the  acquisition  of  the  automobile  interest 
of  the  Otto  Gas  Engine  Works  of  Philadelphia,  and  the  entire  assets 
and  good  will  of  the  Otto  Motor  Car  Sales  Co.  of  Philadelphia. 

The  case  was  decided  below,  and  is  argued  here  on  behalf  of  the 
respondent,  upon  the  theory  that  the  appellant  by  signing  the  sub- 
scription contract  became  a  quasi-stockholder  in  the  proposed  com- 
pany, and  that  having  stood  by  without  protest  and  permitted  the 
organizers  of  the  now  bankrupt  corporation  to  incorporate  it  for 
purposes  entirely  different  from  those  which  were  originally  proposed, 
he  is  deemed  to  have  acquiesced  in  the  change,  and  to  be  bound  by 
their  acts.  But,  clearly,  the  position  of  the  appellant  was  not  that 
of  a  quasi-stockholder  acquiescing  in  the  proposal  of  his  fellow- 
stockholders  to  divert  his  and  their  moneys  to  purposes  other  than 
those  to  which  they  were  agreed  to  be  appropriated  at  the  time  he 
signed  the  subscription.  His  contract,  and  that  of  his  fellow- 
subscribers,  was  to  take  specified  shares  in  a  New  Jersey  corporation 
to  be  thereafter  organized,  having  a  specified  name,  a  specified  amount 
of  capital  stock,  and  to  be  created  for  the  purpose  of  carrying  into 
effect  certain  specified  objects.  The  name  of  the  intended  corporation 
was,  of  course,  of  secondary  importance.  That  it  should  be  organized 
under  the  laws  of  the  state  of  New  Jersey,  and  so  be  clothed  with  all 
the  powers,  was  of  primary  importance.  So,  too,  was  the  amount  of 
the  capital  stock.  But  even  more  important  was  the  purpose  to  which 
the  moneys  of  the  gentlemen  who  signed  these  subscription  certificates 
was  to  be  devoted.  They  became  subscribers  upon  the  express  condi- 
tion that  their  money  should  be  used  for  the  specific  purposes  set 
out  in  the  contracts  signed  by  them,  and  for  such  ancillary  purposes 
as  were  necessary  or  reasonable.  They  never  agreed  to  embark  their 
money  in  any  such  schemes  as  are  exhibited  by  the  certificate  of 
incorporation  by  the  company  of  which  the  plaintiff  is  the  trustee, 
and,  consequently,  had  no  interest  in  the  formation  of  a  company 
to  exploit  those  schemes.  Their  acquiescence  or  non-acquiescence 
in  the  organization  of  such  a  corporation  was  entirely  immaterial, 


FINANCING  THE  BUSINESS  UNIT  393 

so  far  as  the  power  of  the  promoters  to  create  it  for  the  purposes 
specified  in  this  certificate  of  incorporation  was  concerned;  and 
their  protest  against  such  an  action  would  have  been  entirely  unavail- 
ing; for  the  intended  promoters  were  at  perfect  liberty  to  embark 
their  own  capital,  and  the  capital  of  anyone  else  who  desired  to  join 
them  in  floating  any  scheme  which  they  saw  fit  to  inaugurate,  without 
the  let  or  hindrance  of  persons  who  had  no  interest  therein.  So, 
too,  they  had  a  right  to  adopt  the  name  which  was  proposed  for  the 
corporation  intended  to  be  organized  for  the  purposes  expressed  in 
the  subscription  contract  which  the  appellant  signed;  for  no  right 
to  that  name  had  vested  in  him  and  his  fellow-subscribers,  and  could 
not  do  so  until  the  corporation  in  which  they  had  expected  to  invest 
their  money  had  actually  been  formed. 

The  obligation  of  the  defendant  and  his  fellow-subscribers  is 
expressed  within  the  four  corners  of  the  instrument  which  is  the 
foundation  of  the  present  suit.  The  fact  that  the  promoters  of  the 
intended  corporation  saw  fit  to  abandon  the  original  purposes  thereof, 
and  organize  a  company,  the  purposes  of  which  were  radically  different 
in  every  respect,  could  not  alter  the  fundamental  contract  of  Mr. 
Allen  and  his  associates,  and  impose  upon  them  an  obligation  to  invest 
their  moneys  in  the  new  scheme.  We  conclude,  therefore,  that  the 
judgment  under  review  must  be  reversed. 

QUESTIONS 

1.  The  P  Company  brings  an  action  against  D  on  a  stock  subscription. 
D  pleads  by  way  of  defense  that  subsequent  to  his  subscription  the 
legislature  passed  a  law  authorizing  the  corporation  to  consolidate  with 
other  corporations  and  that  the  P  Company  has  consolidated  with  the 
X  Company.     What  decision  ? 

2.  D  pleads  by  way  of  defense  that  he  was  induced  by  fraudulent  represen- 
tations to  make  the  subscription.    What  decision  ? 

3.  D  pleads,  (a)  that  the  corporation  has  so  far  failed  to  comply  with  the 
incorporating  law  that  it  is  only  a  de  facto  corporation;    (b)  that  it  has 
so  far  failed  to  comply  with  the  incorporating  law  that  it  is  not  even 
a  de  facto  corporation.    What  decision  ? 

4.  D  pleads,  (a)  that  the  amount  of  stock  required  by  the  statute  has  npt 
been  subscribed;   (b)  that  the  corporation  is  not  enforcing  the  subscrip- 
tions of  other  subscribers.     What  decision  ? 

5.  D  pleads,  (a)  that  the  corporation  is  not  proceeding  with  reasonable 
diligence  in  the  performance  of  its  corporate  purposes;    (b)  that  the 
corporation  has  abandoned  its  corporate  franchises.     What  decision  ? 


394  LAW  AND  BUSINESS 

BUCKSPORT  AND  BANGOR  RAILROAD  COMPANY  v. 
INHABITANTS  OF  BREWER 

67  Maine  Reports  295  (1877) 

Case  to  recover  $20,000,  subscription  to  the  capital  stock  of  the 
plaintiff  company,  alleging  a  completion  of  the  road  and  a  demand 
and  refusal  to  pay  the  subscription,  which  was  in  accordance  with 
the  following  vote  of  the  inhabitants  of  Brewer  at  a  meeting  held 
December  5,  1871 :  "That  the  selectmen  be  and  are  hereby  authorized 
and  instructed  to  subscribe  $20,000  to  the  capital  stock  of  the 
Penobscot  and  Union  River  Railroad  Co.,  on  the  following  con- 
ditions, viz :  The  road,  when  built,  shall  connect  with  the  European 
and  North  American  Railroad,  and  shall  be  located  through  the  town 
of  Brewer,  satisfactory  to  the  selectmen  of  said  town.  The  town 
shall  not  be  bound  for  any  further  sums  than  that  written  by  the 
selectmen  acting  under  the  instructions  of  the  town."  The  name 
of  the  plaintiff  road  was  afterward  changed  but  no  point  was  made 
of  that. 

The  declaration  alleged  in  one  count  "that  the  road  was  located 
through  the  town  of  Brewer,  satisfactory  to  the  selectmen"  of  said 
town;  and  in  another  count  "the  said  road  was  located  wisely, 
prudently  and  judiciously,  for  the  interests  of  said  corporation  and 
said  town  of  Brewer,  and  that  the  selectmen  of  said  town  have 
hitherto  unreasonably  and  fraudulently  refused  to  approve  said 
location  as  satisfactory  to  them." 

The  principal  ground  of  defense  was  that  the  subscription  was  on 
conditions,  one  of  which  was  a  condition  precedent  and  had  not 
been  complied  with. 

It  was  in  proof  that  the  first  condition,  "  that  the  road  when  built 
shall  connect  with  the  European  and  North  American  Railroad" 
has  been  complied  with;  and  that  the  road  had  been  located  and  built 
through  the  town  of  Brewer;  but  there  was  no  evidence  that  the 
selectmen  had  expressed  satisfaction  with  the  location. 

VIRGIN,  J.  Any  city  or  town,  by  a  two- thirds'  vote,  may  raise 
and  appropriate  a  sum  of  money  not  exceeding  5  per  cent  on  its 
valuation,  "to  aid  in  the  construction  of  railroads  in  such  manner  as 
it  deems  proper;  and  for  such  purpose  may  make  contracts  with  any 
person  or  railroad  corporation."  R.S.,  c.  51,  section  80. 

The  plaintiffs  contend  that  the  subscription  contract  declared 
on  was  made  by  the  defendants  in  accordance  with  the  authority 
conferred  by  the  foregoing  statute. 


FINANCING  THE  BUSINESS  UNIT  395 

Passing  all  questions  of  consideration,  acceptance,  or  whether 
the  subscription  contains  a  promise  to  pay  money,  or  whether  the 
selectmen  exceeded  their  authority  and  assuming  on  all  such  pre- 
liminary matters  the  view  most  favorable  to  the  plaintiffs,  we  come 
directly  to  the  construction  of  the  subscription  in  respect  to  the 
conditions  therein  contained. 

The  subscription,  whether  of  money  or  stock,  is  conditional. 
Such  is  its  express  language.  The  terms  are  not  ambiguous  like 
" provided  that"  and  other  similar  phrases  which  do  not  always 
import  a  condition,  but  the  subscription  is  declared  to  be  made  "on 
the  following  conditions."  The  declaration  alleges  the  contract 
was  conditional  and  avers  performance  in  one  count  in  the  very  terms 
of  the  condition,  and  undertakes  to  set  out  an  excuse  for  neglect  of  a 
literal  performance  in  the  other.  The  contract  contains  two  distinct 
and  independent  conditions,  one  pertaining  to  the  connection  of  the 
plaintiff's  road  "when  built"  with  the  European  and  North  American 
Railroad  on  the  other  side  of  the  Penobscot  River,  and  the  other  to 
the  location  of  the  same  through  the  town  of  Brewer.  It  matters 
naught  that  they  may  be  of  different  natures;  for  if  the  former  be  a 
condition  subsequent  and  had  been  fully  performed  (as  the  defendants 
admit)  before  the  commencement  of  this  action,  and  the  latter  be  a 
condition  precedent  and  has  not  been  actually  performed,  then  the 
action  cannot  be  maintained.  Mill  Dam  Foundry  v.  Hovey,  21  Pick. 
417,  437;  Ticonic  Co.  v.  Lang,  63  Maine,  480;  Porter  v.  Raymond, 
S3  N.H.  519. 

The  controlling  question  then  is:  What  is  the  nature  of  the  condi- 
tion which  requires  that  the  road  "shall  be  located  through  the  town 
of  Brewer,  satisfactory  to  the  selectmen  of  said  town"?  The  word 
"precedent"  is  not  in  it;  and  neither  is  it  essential  that  it  should  be 
to  warrant  its  interpretation  as  a  condition  of  that  nature.  Condi- 
tions have  no  idiom.  Whether  they  be  precedent  or  subsequent 
is  a  question  purely  of  intent;  and  the  intention  must  be  determined 
by  considering  not  only  the  words  of  the  particular  clause,  but  also 
the  language  of  the  whole  contract  as  well  as  the  nature  of  the  act 
required,  and  the  subject-matter  to  which  it  relates.  Sewall  v. 
Wilkins,!^  Maine,  168;  Robbins  v.  Gleason,  47  Maine,  259;  Schwoerer 
v.  Boylston  M.  Association,  99  Mass.  285. 

Judged  by  this  rule  of  common  sense,  we  entertain  no  doubt  that 
this  condition  was  intended  and  understood  by  the  parties  as  a  condi- 
tion precedent,  and  that  it  was  to  be  strictly  performed  before  the 


396  LAW  AND  BUSINESS 

defendants  could  be  held  liable.  The  defendants  were  under  no 
moral  or  legal  obligation  to  aid  the  plaintiffs.  They  simply  had  the 
legal  authority  to  do  so,  if  they  chose;  and  for  that  purpose  might 
make  any  contract,  absolute  or  conditional,  not  forbidden  by  law. 
Observation  demonstrated  that  the  mere  fact  of  a  railroad  passing 
through  some  part  of  a  town  did  not  necessarily  enrich  it;  while  the 
particular  business  of  a  town  and  its  locality  might  be  such  as  to 
warrant  a  generous  subscription  in  aid  of  a  road  passing  through  a 
particular  part.  We  can  readily  understand,  therefore,  why  the 
defendants,  in  consulting  their  own  material  interests,  did  not  blindly 
make  an  absolute  subscription  of  money  to  the  stock  of  the  road, 
but  might  make  a  conditional  one  from  which  they  might  reasonably 
anticipate  direct  returns  by  way  of  increased  railroad  facilities, 
provided  the  new  road  could  be  located  where  it  could  better  accom- 
modate their  business,  while  river  navigation  is  closed,  than  the  old 
roads  across  the  river,  and  not  otherwise. 

By  the  express  terms  of  this  condition,  the  location  in  Brewer 
was  to  be  "satisfactory  to  the  selectmen  of  said  town."  This  clause 
is  a  substantive  part  of  the  condition;  and  the  plaintiffs  can  have  no 
right  of  action  until  they  have  strictly  performed  it.  If  the  evidence 
satisfied  us  that  the  location  was  in  fact  made  "wisely,  prudently 
and  judiciously  for  the  interests  of  said  corporation  and  said  town  of 
Brewer,"  as  alleged  in  the  second  count,  while  we  might  conclude 
therefrom  that  the  plaintiffs'  directors  had  performed  their  duty  thus 
far,  it  would  not  follow  that  they  had  performed  the  condition;  for 
the  satisfaction  of  the  selectmen  would  be  wanting.  The  defendants 
chose  to  be  governed  by  the  judgment  of  their  board  of  selectmen 
instead  of  that  of  the  plaintiffs'  engineers,  directors,  or  of  a  jury, 
or  any  other  tribunal.  The  plaintiffs  had  the  same  liberty  to  accept 
as  the  defendants  had  to  propose  terms.  If  they  accepted,  they 
must  be  governed  by  them  as  they  were  made.  We  cannot  change 
them  or  substitute  others.  The  authorities  requiring  strict  per- 
formance are  numerous  and  pointed. 

The  evidence  of  the  engineers  tending  to  prove  that  the  route 
actually  selected  was  the  most  feasible,  cheapest,  and  best  is  entirely 
immaterial.  It  has  no  tendency  to  show  performance,  neither  does 
it  show  any  legal  excuse  for  non-performance  of  the  condition  on 
which  payment  by  the  defendants  was  made  to  depend.  There  is 
no  pretense  that  performance  was  impossible  at  the  time  the  con- 
ditional subscription  was  made,  or  that  it  was  subsequently  rendered 


FINANCING  THE  BUSINESS  UNIT  397 

so  by  the  act  of  God,  the  law,  or  by  the  defendants.     Co.  Litt.  2o6a. 
Blake  v.  NUesy  13  N.H.  459;  Dermott  v.  Jones,  2  Wall.  i. 

The  selectmen  took  no  part  in  the  location  which  was  made. 
Their  opinion  was  not  asked  and  they  did  not  volunteer  any  advice. 
They  were  a  tribunal  to  decide  and  not  a  party  whose  action  or  non- 
action  outside  of  their  province  could  have  any  influence  for  or  against 
the  defendants.  Neither  can  the  mere  silence  of  the  defendants  be 
construed  as  a  waiver,  since  it  is  consistent  with  other  explanations. 
Burlington,  etc.  Railroad  Co.  v.  Boestler,  15  Iowa,  555. 

Plaintiffs  nonsuit. 
QUESTIONS 

1.  "The  evidence  of  the  engineers  tending  to  prove  that  the  route  actually 
located  was  the  most  feasible,  cheapest,  and  best  is  entirely  immaterial." 
Why? 

2.  What  was  the  nature  of  the  subscription  in  this  case?    Was  it  made 
before  or  after  the  corporation  came  into  existence?    What  difference 
does  it  make  whether  it  was  made  before  or  after  incorporation  ? 

3.  What  is  the  relation  of  a  person,  who  conditionally  subscribes  for  stock 
in  a  corporation,  before  the  performance  of  the  condition  ? 

4.  D  conditionally  agreed  to  subscribe  for  stock  in  the  P  Company  when 
organized.    The  P  Company  was  subsequently  organized  under  a  general 
incorporating  law  which  required  that  one-half  of  its  authorized  capital 
be  subscribed  for  before  it  did  business.    With  D's  subscription  one-half 
of  the  authorized  capital  of  the  corporation  has  been  subscribed  for. 
What  is  the  effect  of  D's  conditional  subscription  on  the  validity  of  the 
corporation  ? 

PADUCAH  AND  MEMPHIS  RAILROAD  COMPANY  v.  PARKS 

86  Tennessee  Reports  554  (1888) 

LURTON,  J.  These  four  suits  at  law  against  subscribers  to  the 
stock  of  the  Paducah  &  Memphis  Railroad  Co.  were  tried  by  consent 
together;  and,  a  jury  being  waived,  the  issues  of  law  and  fact  were 
submitted  to  the  circuit  judge,  who  has  filed  his  special  findings  of 
fact  and  law  as  part  of  the  record.  There  was  a  judgment  in  favor  of 
each  of  the  defendants,  and  an  appeal  by  the  plaintiffs. 

The  contract  of  subscription  upon  which  the  suit  was  brought 
was  as  follows: 

July  3ist,  1872 — We,  the  subscribers,  agree  and  bind  ourselves,  our 
heirs,  and  legal  representatives,  to  pay  to  the  Paducah  &  Memphis  Railroad 
Company  the  sums  by  us  subscribed,  to  the  stock  in  said  railroad  company, 


398  LAW  AND  BUSINESS 

upon  the  following  terms  and  conditions,  to  wit:  One- fourth  to  be  paid 
when  the  road  is  completed  to  the  north  or  south  line  of  Dyer  County; 
the  remainder  of  the  amount  subscribed  to  be  paid  in  four  equal  installments 
of  four  months,  as  the  work  progresses  through  the  county:  Provided, 
The  company  establish  a  depot  on  said  road  within  fifteen  hundred  feet  of 
G.  B.  Tinsley's  corner  store,  supposed  to  be  the  center  of  Newbern.  It  is 
further  provided  that  certificates  of  stock  issue  to  said  subscribers  as  to 
other  stockholders  in  said  company,  upon  the  payment  of  their  subscription. 

The  proof  shows  that  there  was  a  gap  in  the  line  of  a  road  projected 
between  Paducah,  Kentucky,  and  Memphis,  Tennessee,  each  end 
of  the  road  being  in  operation  and  owned  by  different  companies. 
The  new  company  was  the  result  of  the  consolidation  of  the  two 
old  companies,  and  it  undertook  the  completion  of  the  missing  link. 
Dyer  County,  of  which  Newbern  is  a  flourishing  village,  would  be 
crossed  by  the  finished  road. 

The  assignments  of  errors  are  so  defective  as  to  raise  no  question 
of  fact,  but  the  second  assignment  is  sufficient  to  raise  a  question  of 
law.  We  have,  therefore,  treated  the  facts  as  found  by  the  circuit 
judge  as  the  facts  of  the  case,  and  will  test  the  soundness  of  the  result 
he  reached  by  the  law  applicable.  The  facts  necessary  to  be  stated, 
as  found  by  His  Honor,  are  as  follows: 

"That  work  was  commenced  on  said  unfinished  part  of  the  road  early  in 
1872,  and  the  Dyer  County  line  was  reached  on  the  north  in  April,  1873, 
and  on  the  twenty-eighth  of  that  month  it  ran  its  train  of  cars  into  Trimble 
Station,  in  said  county.  On  the  fifteenth  of  May  thereafter  the  company 
made  a  call  for  one-fourth  of  the  subscription,  according  to  contract." 
This  call,  together  with  the  second  and  third  calls,  was  paid  by  each  of 
the  defendants.  "The  company  did  work  on  the  road  in  Dyer  County 
until  the  last  of  July  or  first  of  August,  1874,  at  which  time  it  ceased 
operations  and  work  of  all  sort.  The  work  principally  done  in  Dyer  County 
was  between  Dyersburg  and  Trimble  Station,  the  road  was  mostly  graded, 
or  a  great  deal  of  it,  from  Trimble  Station  to  Newbern,  and  between  New- 
bern and  Dyersburg,  and  in  places  bridges  were  constructed,  and  cross-ties 
were  collected  in  one  or  more  places  to  be  placed  on  the  road  The  road 
was  widened  at  the  place  where  the  depot  now  stands  [in  Newbern]  as  if 
for  side-track,  but  the  company  owned  no  property  or  land  outside  of  the 
right  of  way  upon  which  a  depot  could  be  located." 

He  further  held  that  the  proof  did  not  show  any  further  prepara- 
tions for  the  establishment  of  a  depot  at  Newbern  than  the  widening 
of  the  grade  at  that  point  for  side-track  purposes.  He  further  found 


FINANCING  THE  BUSINESS  UNIT  399 

that,  shortly  after  cessation  of  work  in  August,  1874,  foreclosure 
proceedings  were  instituted  by  bond  creditors  and  the  property  and 
franchises  of  the  corporation  sold  at  public  sale,  and  acquired  by  the 
Chesapeake  &  Ohio  Railroad  Co.;  and  this  company,  being^  an 
entirely  new  and  independent  organization,  has  since  finished  the 
projected  road  through  Dyer  County.  That  to  induce  location  of 
depot  at  Newbern,  citizens  of  that  place  had  been  compelled  to  make 
a  new  contract  with  the  successor  company,  who  had  assumed  none 
of  the  contracts  or  liabilities  of  the  old  company.  He  further  found 
that  the  old  corporation  was  utterly  insolvent  at  the  time  it  abandoned 
work,  and  that  at  time  of  trial  they  had  no  property,  franchises,  and 
practically  no  existence. 

The  subscription  list  was  accepted  by  the  Paducah  &  Memphis 
Railroad  Co.,  and  on  the  twelfth  of  September,  1873,  after  payment 
of  first  call  by  subscribers,  was  assigned  to  Childs,  Stephens  &  Co., 
contractors  for  work  in  Dyer  County,  in  part  payment  for  work  done 
and  to  be  done  by  them.  The  suit  is  by  these  assignees  and  credi- 
tors of  the  insolvent  company.  Three  of  the  suits  are  for  the  fourth 
call,  which  matured  in  May,  1874,  and  before  work  had  ceased,  and 
the  fourth  defendant  is  sued  alone  upon  the  fifth  and  last  call,  which 
did  not  mature,  in  point  of  time,  until  September,  1874,  which  was  after 
all  effort  to  complete  the  road  had  been  abandoned.  The  question 
is  as  to  whether  defendants  are  liable  for  any  of  the  unpaid  calls.  His 
Honor,  the  circuit  judge,  was  of  opinion  that  the  construction  of  the 
road  to  the  line  of  the  county  was  a  condition  precedent  to  any 
liability,  but  that  this  condition  had  been  met.  He  was  further  of 
opinion  that  the  stipulation  requiring  the  establishment  of  a  depot 
at  Newbern  was  an  independent  provision,  and  not  a  condition  prece- 
dent to  liability  upon  the  contract  of  subscription.  This  latter  provi- 
sion he  held  required  and  meant  the  erection  of  a  depot  building,  with 
reasonable  facilities  for  freight  and  passengers.  Upon  these  facts, 
and  upon  the  contract  as  thus  construed,  the  circuit  judge  held  that, 
although  the  stipulation  as  to  a  depot  was  not  a  condition  precedent, 
yet  it  was  a  part  of  the  agreement  of  the  corporation  which,  at  some 
reasonable  time,  it  was  bound  to  carry  out,  and  that  as  it-  was  now 
obvious  that  the  utter  insolvency  of  the  company,  and  the  sale  of 
its  property  and  franchises,  had  rendered  the  performance  of  this 
contract  impossible,  that  it  therefore  followed  that  the  defendants 
were  released  from  liability  upon  their  stock,  both  as  to  calls  accruing 
before  and  after  the  abandonment  of  work  upon  the  road. 


400  LAW  AND  BUSINESS 

In  this  conclusion  we  think  he  erred.  If  it  be  conceded  that 
the  proviso  concerning  a  depot  at  Newbern  :s  not  a  condition 
precedent,  as  His  Honor  does,  then  it  must  follow  that  a  breach  of  an 
independent  covenant  will  not  discharge  the  other  parts  of  the 
contract,  but  that  the  party  damaged  by  such  breach  must  rely  upon 
his  remedy  at  law  for  damages,  or  his  remedy  in  equity,  by  bill  for 
a  specific  performance.  Such  breach  will  not  defeat  a  right  of  action 
upon  those  parts  of  the  contract  not  dependent  upon  it.  Before 
such  right  of  action  for  a  breach  of  covenant  arose  the  stock  list  was 
assigned  to  creditors  of  the  company,  and  hence  such  breach  cannot, 
as  against  such  assignees,  be  set  up  to  defeat  or  abate  their  legal 
right  of  recovery.  If  the  construction  of  a  depot  had  been  made  a 
condition  precedent  to  the  subscription,  or  to  liability  for  calls  upon 
stock,  then  it  would  devolve  upon  plaintiff  to  show  performance  of 
such  precedent  condition;  but,  on  the  other  hand,  if  the  parties  have 
not  chosen  to  make  responsibility  depend  upon  performance  of  this 
stipulation,  then  clearly,  defendants  must  rely  upon  their  independent 
remedy  against  the  company. 

We  agree  with  His  Honor  that  this  proviso  as  to  a  depot  was  not 
a  condition  precedent,  but  a  mere  independent  stipulation. 

The  capital  of  stock  companies  consists  of  their  stock  subscrip- 
tions. This  is  the  basis  of  credit,  and  an  essential  to  the  organization. 
This  is  a  trust  fund  for  the  benefit  of  creditors  in  case  of  insolvency. 
Conditional  subscriptions  to  the  stock  of  corporations  are  unusual, 
and  often  operate  to  defeat  subscribers  who  become  such  absolutely 
and  upon  the  faith  that  all  the  stock  is  equally  bound  to  contribute 
to  the  hazards  of  the  enterprise.  It  misleads  creditors,  and  is  the 
fruitful  source  of  litigation  and  disaster.  Tending  to  the  ensnarement 
of  creditors,  and  contrary  to  a  sound  public  policy,  conditional 
subscriptions  to  corporate  shares  ought  not  to  be  encouraged.  Their 
validity,  however,  is  too  firmly  fixed  by  a  long  line  of  decisions  to  be 
now  overturned,  yet  the  courts  will  not  strain,  where  creditors  are 
concerned,  to  convert  independent  covenants  into  conditions  prece- 
dent. If  a  subscriber  desires  to  make  his  liability  depend  upon  the 
performance  of  some  stipulation  by  the  corporation,  it  is  very  easy  for 
him  to  do  so  in  express  terms.  In  the  case  now  under  consideration, 
it  is  obvious  that  the  subscribers  did  not  intend  to  make  the  building 
of  a  depot  at  Newbern  a  condition  upon  which  their  liability  should 
depend.  They  expressly  provide  that  one-fourth  of  their  subscription 
shall  fall  due  when  the  line  of  the  road  is  completed  to  the  county  line. 


FINANCING  THE  BUSINESS  UNIT  401 

Now,  this  was  a  condition  precedent,  but  when  it  was  complied 
with  the  subscription  became  absolute,  and  one-fourth  payable  at 
once,  and  the  remainder  as  the  work  progressed  through  the  county, 
in  four  instalments,  four  months  apart.  Now,  a  depot  at  Newbern 
would  be  folly  without  a  railroad  in  operation,  and  every  instalment 
might  fall  due  by  lapse  of  time  and  continued  work  within  the  county, 
before  a  depot  would  be  of  any  practical  value.  The  fact  that  the 
first  call  became  payable  when  the  road  reached  the  county  line, 
settles  the  meaning  attached  to  this  stipulation.  The  acts  stipulated 
to  be  done  are  to  be  done  at  different  times.  Hence  they  are  independ- 
ent of  each  other,  and  the  remedy  of  the  subscriber  for  breach  of  such 
a  stipulation  is  in  damages.  Goldsborough  v.  Orr,  8  Wheat.  217. 

This  brings  us  to  a  consideration  of  the  question  as  to  whether 
a  suit  for  the  last  instalment  of  these  stock  subscriptions  can  now 
be  maintained.  The  subscription  provided  for  the  maturity  of  the 
calls  subsequent  to  the  first  in  the  following  language: 

"The  remainder  of  the  amount  subscribed  to  be  paid  in  four 
equal  instalments  of  four  months  as  the  work  on  the  road  progresses 
through  the  county."  The  work  was  progressing  at  the  time  the  second, 
third,  and  fourth  calls  were  made,  and  there  can  be  no  doubt  but  that 
they  were  rightfully  called,  and  properly  demanded.  But  when  the 
last  instalment  was  called  all  work  had  been  abandoned,  and  has  never 
since  been  resumed.  We  are  of  opinion  that  this  last  instalment 
has  never  matured.  The  requirement  that  the  calls  subsequent  to 
the  first  should  be  made  in  equal  instalments  "as  the  work  progressed 
through  the  county, "  is  a  condition  precedent  to  the  maturity  of  each 
instalment;  and  the  abandonment  of  the  work  before  it  was  finished 
and  before,  in  point  of  time,  the  last  call  could  have  been  made  if  the 
work  had  been  carried  on  in  good  faith,  defeats  the  action  for  this 
instalment.  No  right  to  call  for  or  sue  upon  this  instalment  exists 
by  reason  of  the  failure  of  the  company  to  show  that  the  road  was 
finished,  or  work  going  on,  within  the  county  at  the  time  it  was 
demanded.  The  objection  is  made  by  defendants  that  these  suits 
cannot  be  maintained  because  no  tender  of  stock  certificates  has  been 
made.  This  assignment  of  error  is  not  tenable.  This  is  not  a  case 
of  the  purchase  of  stock  certificates  as  negotiable  securities.  The 
tender  in  such  a  case  might  be  necessary  to  maintain  suit  for  the  price. 
But  no  tender  is  necessary  to  maintain  suit  upon  an  ordinary  subscrip- 
tion for  stock.  Morawetz  on  Corporations  (2d  ed.),  sections  61  and 
148. 


402  LAW  AND  BUSINESS 

The  set-off  relied  upon  by  the  defendant,  Ferrell,  in  the  suit  against 
him  was  improperly  disallowed,  the  court  holding  "that  there  was 
no  proof  that  defendant  filed  or  relied  upon  said  account  as  a  set-off 
in  that  case  until  it  was  barred  by  the  statute  of  limitations."  This 
suit  was  begun  before  a  magistrate  and  no  formal  plea  of  set-off  was 
necessary  there,  or  upon  trial  of  appeal  in  circuit  court.  He  did  in 
fact  rely  upon,  and  prove,  that  the  company  was  in  fact  indebted  to 
him  by  account  for  lumber  used  in  construction  at  the  time  they 
assigned  his  subscription  to  plaintiffs.  This  account  was  not  barred 
at  the  time  suit  was  instituted  against  him  upon  his  subscription, 
and  the  statute  did  not  thereafter  run  against  his  set-off.  Williams 
v.  Lenoir,  8  Bax.  395. 

Upon  this  plea  of  set-off,  the  judgment  in  favor  of  Ferrell  (though 
placed  by  His  Honor  upon  another  ground)  must  be  affirmed.  The 
judgment  in  favor  of  Hoskins  must  also  be  affirmed,  as  he  is  alone 
sued  upon  the  last,  instalment,  having  paid  all  the  others.  The  cost 
of  both  these  cases  in  the  court  below,  and  one-half  the  costs  of  this 
court,  will  be  paid  by  appellants.  The  judgments  in  favor  of  Parks 
and  Harris  must  be  reversed,  and  judgment  rendered  here  for  the 
fourth  call,  with  interest  and  costs  in  each  of  the  cases  against  them 
and  one-half  the  costs  of  this  appeal. 

QUESTIONS 

1.  Can  this  case  be  reconciled  with  the  case  of  Bucksport  &  Bangor  Railroad 
Co.  v.  Brewer,  supra,  page  394  ? 

2.  What  is  the  difference  between  a  conditional  subscription  for  stock  in  a 
corporation  and  a  subscription  on  special  terms  ? 

3.  What  is  the  legal  effect  of  a  subscription  for  stock  on  special  terms? 

4.  In  cases  of  doubt  courts  are  inclined    to  construe  such  contracts  as 
subscriptions  on  special  terms  rather  than  as  conditional  subscriptions. 
Why? 

BENWELL  v.  CITY  OF  NEWARK 

55  New  Jersey  Equity  Reports  260  (1897) 

(Reprinted,  supra,  Vol.  II,  p.  469) 

QUESTIONS 

1.  What  is  the  essential  nature  of  a  bond?     Does  it  resemble  more  nearly 
a  certificate  of  stock,  a  bill  of  exchange,  or  a  promissory  note  ? 

2.  In  what  sense  is  a  bond  a  device  for  raising  credit  ?     What  kind  of  credit 
is  typically  created  by  bonds  ? 


FINANCING  THE  BUSINESS  UNIT  403 

3.  Compare  the  functions  of  a  bond  with  the  functions  of  stock  in  financing 
a  corporation. 

4.  Under  what  circumstances  and  to  what  extent  does  a  corporation  possess 
the  power  to  raise  money  by  bonds  ? 

5.  Can  partners  issue  bonds  in  financing  their  business  ?     If  they  can, 
why  is  it  that  as  a  general  rule  they  do  not  do  so  ? 

3.    Inducements  to  Investors 

a)     Transfer  ability  of  Interest 

THE  FARMERS'  AND  MERCHANTS'  BANK  OF  LINEVILLE 

»..  WASSON 

48  Iowa  Reports  336  (1878) 

The  plaintiff  instituted  an  action  at  law  against  H.  W.  Wilson, 
and  caused  an  attachment  to  issue  therein,  and  process  of  garnishment 
to  be  served  upon  defendant,  Wasson.  The  foundation  of  the  action 
against  Wilson  was  a  promissory  note  given  plaintiff  for  money 
borrowed  and  an  account  for  an  overdraft. 

The  defendant,  in  the  proceedings  of  garnishment,  is  sought  to 
be  charged  on  account  of  certain  stock  of  the  bank  owned  by  Wilson, 
as  it  is  alleged,  to  which  Wasson  sets  up  a  claim  as  the  assignee  thereof. 
The  cause  was  finally  regarded  as  a  chancery  proceeding  and  tried 
as  such.  By  the  final  decree  of  the  court,  it  was  held  that  the  stock, 
fifty  shares,  claimed  by  the  defendant,  was  held  by  him  subject  to  the 
attachment  and  judgment  of  plaintiff,  and  judgment  for  the  value 
thereof,  three  thousand  three  hundred  and  twenty-three  dollars  and 
ninety-three  cents,  was  rendered  against  defendant.  He  appeals 
from  the  decree  to  this  court. 

BECK,  J.  At  the  time  the  indebtedness  accrued,  which  is  the 
foundation  of  the  action  wherein  the  process  of  garnishment  was  issued, 
Wilson  was  a  stockholder  and  director  of  plaintiff,  and  Wasson,  the 
defendant,  was,  and  continued  to  be  at  the  time  the  process  was  served 
upon  him,  a  stockholder  of  the  bank,  and  president  of  its  board  of 
directors. 

Wilson  became  indebted  to  the  bank  for  money  borrowed,  and  for 
overdrafts.  Wasson  became  his  surety  upon  a  note  to  another  for 
another  sum  borrowed,  and  was  secured  by  an  assignment  of  the  bank 
stock  in  question,  which,  however,  was  not  made  as  provided  for  by 
the  by-laws  of  the  bank.  It  became  known  that  Wilson  was  in 
failing  circumstances;  thereupon  defendant  obtained  from  him  a 


404  LAW  AND  BUSINESS 

transfer  of  the  fifty  shares  of  stock  in  controversy,  under  an  arrange- 
ment that  defendant  should  pay  the  debt  for  which  he  was  surety. 
The  transfer  was  made  by  assignment  of  the  receipts  given  for  the  pay- 
ments made  upon  the  stock,  and  also  by  the  execution  of  a  separate 
instrument  in  sufficient  form.  The  transaction  was  had  in  the  bank- 
ing house,  in  the  presence  of  the  cashier  and  a  memorandum  of  the 
transfer  was  made  upon  the  proper  book  of  the  bank.  There  is  no 
testimony  establishing  fraud  on  the  part  of  the  defendant.  He 
became  surety  for  Wilson,  so  far  as  the  facts  appear  in  the  record,  in 
the  regular  course  of  business.  He  practiced  no  concealment  or 
artifice  upon  the  other  officers  of  the  bank  in  any  of  the  transactions. 
The  object  he  had  in  view  in  taking  tne  stock  as  security,  and  in  its 
final  purchase  was. to  protect  himself  as  surety  of  Wilson.  His  good 
faith  was  not  impugned  by  the  testimony  before  us. 

The  articles  of  incorporation  of  plaintiff  provide  that  no  transfer 
of  stock  is  valid,  except  as  between  the  parties,  until  it  is  entered 
upon  the  books  of  the  bank;  and  a  by-law  further  declares  that, 
until  approved  and  accepted  by  the  board  of  directors,  it  is  invalid. 
The  transfer,  as  we  have  stated,  was  entered  upon  the  proper  book 
of  the  bank,  but  the  directors  refused  to  approve  and  accept  it. 
Their  refusal  was  expressed  after  the  transactions  between  defendant 
and  Wilson,  and  after  the  assignment  had  been  executed. 

Upon  the  foregoing  facts,  we  are  to  determine  whether  defendant 
acquired  property  in  the  stock  of -Wilson  by  the  assignment,  and 
whether  the  transactions  are  of  such  a  character  as  to  create  a  liabil- 
ity on  his  part  for  the  value  of  the  stock. 

The  articles  of  incorporation  and  by-laws  declare  that  no  valid 
transfer  of  stock  can  be  made  until  it  is  entered  upon  the  books  of  the 
corporation.  This  restriction  accords  with  the  law  of  the  state. 
Code,  section  1078.  But  they  also  contain  a  further  restriction,  to 
the  effect  that  the  validity  of  a  transfer  depends  upon  the  approval 
and  acceptance  of  the  board  of  directors  of  the  bank. 

These  restrictions  are  intended  for  the  benefit  of  the  corporation, 
when  its  rights  may  be  protected  thereby,  and  to  prevent  the  transfer 
of  stock  to  irresponsible  persons,  which,  if  it  should  occur,  would 
have  the  effect  to  impair  the  credit  of  the  bank.  The  restriction  first 
mentioned  is  necessary,  in  order  that  the  officers  of  the  corporation 
may  know  who  are  stockholders,  which  is  essential  in  conducting 
elections  of  officers,  and  for  other  matters.  It  can  never  defeat  the 
rights  of  other  parties,  and,  in  all  cases,  must  be  regarded  as  a  reason- 


FINANCING  THE  BUSINESS  UNIT  405 

able  requirement.  This,  if  it  were  not,  as  it  is,  in  accord  with  an  ex- 
press provision  of  the  statute  of  the  state,"  would  demand  that  it  be 
upheld  by  the  courts. 

But  the  same  things  are  not  true  of  the  other  restriction.  While 
it  may  be  lawfully  enforced  to  protect  rights  of  the  corporation,  it 
cannot,  in  other  cases  be  exercised  without  limitation  so  as  to  defeat 
the  rights  of  others.  If  the  corporation  has  no  rights  to  be  protected 
by  its  exercise,  and  other  parties  would  be  deprived  of  their  property 
thereby,  it  cannot  be  enforced  in  such  cases.  Its  enforcement  would 
operate  as  an  infringment  upon  the  property  right  of  others,  which 
the  law  will  not  permit.  It  would,  besides,  operate  as  a  restraint 
upon  the  disposition  of  property  in  the  stock  of  the  corporation,  in 
the  nature  of  restraint  of  trade,  which  the  courts  will  not  tolerate. 
As  the  restriction  is  not  imposed  by  express  authority  of  the  statute 
of  the  state,  it  cannot,  in  such  cases,  be  enforced.  These  conclusions 
are  supported  by  the  following  authorities:  Sargent  v.  Franklin 
Insurance  Co.,  8  Pick.,  90;  Quiner  y.  Marblehead  Insurance  Co.,  10 
Mass.,  476;  Angell  and  Ames  on  Corporations,  section  567;  United 
States  v.  Vaughan,  3  Binn.,  394;  Chambersburg  Insurance  Co.  v. 
Smith,  ii  Pa.  St.,  120;  Chateau  Springs  Co.  v.  Harris,  20  Mo.,  382. 

We  will  now  inquire  whether  plaintiff  had  any  right  to  the  stock  in 
question,  or  lien  thereon,  which  it  was  necessary  to  protect  and  enforce 
by  the  provision  of  the  by-law  forbidding  transfer  of  the  stock  without 
the  assent  of  its  directors. 

It  is  not  claimed  that  plaintiff  held  any  interest  in  or  right  to  the 
stock,  under  any  contract,  prior  to  the  proceedings  of  garnishment. 
In  the  absence  of  a  contract,  its  relation  to  the  stock  is  that  of  a 
stranger.  The  stock  is  the  exclusive,  absolute  property  of  the  stock- 
holder, and  is  held  by  him  free  from  any  claim  or  right  of  the  corporation, 
in  the  absence  of  contract  or  provisions  of  the  charter  or  by-laws  creat- 
ing such  claim  or  right,  which  have  not  been  shown  to  exist  in  this  case. 

In  the  absence  of  contract  and  provisions  of  the  charter  or  by-laws, 
a  corporation  has  no  implied  lien  upon  the  shares  of  a  stockholder 
indebted  to  it,  to  secure  such  indebtedness.  Mass.  Iron  Co.  v.  Hooper, 
7  Cush.,  183;  Sargent  v.  Franklin  Insurance  Co.,  8  Pick.,  90;  Heart 
v.  State  Bank,  2  Dev.  Eq.,  m;  Angell  and  Ames  on  Corporations, 
sections  355,  569;  Dana  v.  Brown,  i.  J.  J.  Marsh,  304. 

We  discover  nothing  in  the  case,  which  in  equity  gives  plaintiff 
a  right  to  the  stock  in  controversy  superior  to  defendant,  in  view 
of  the  official  and  fiduciary  relation  held  by  defendant  as  president 


406  LAW  AND  BUSINESS 

of  the  bank.  We  have  remarked  that  the  transactions  whereby 
defendant  became  bound"  as  surety  of  Wilson,  and  the  stock  was 
assigned  as  security  to  defendant,  and  finally  transferred  in  pay- 
ment of  Wilson's  debt,  exhibit  no  circumstances  which  justify 
the  conclusion  that  defendant  practiced  any  fraud  or  concealment 
whereby  plaintiff  was  induced  to  give  credit  to  Wilson  or  to  refrain 
from  an  attempt  to  seize  the  stock.  Defendant  in  good  faith 
became  surety  for  Wilson.  The  case  then  stood  in  this  way:  Plain- 
tiff and  defendant  were  both  creditors  of  Wilson.  Defendant  was 
an  officer  of  plaintiff,  but  was  not  exclusively  charged  with  the 
management  of  plaintiff's  business.  Indeed  it  was  principally  con- 
ducted by  the  cashier,  as  to  matters  not  controlled  by  the  board 
of  directors.  The  transfer  of  the  stock  to  defendant  was  made 
with  the  knowledge  of  the  cashier,  who  interposed  no  objection 
thereto,  and  no  effort  was  made  by  him  or  any  other  officer  of  the  bank 
to  prevent  it.  Indeed,  it  is  not  shown  that  any  intention  or  desire 
was  entertained  by  any  officer  of  the  bank  to  subject  in  any  manner 
the  stock  to  pay  the  indebtedness  of  Wilson.  It  appears,  however,  to 
have  been  understood  by  all  parties  at  that  time  that  Wilson  was 
in  failing  circumstances.  No  principle  of  equity  or  law  required 
defendant  to  refrain  from  taking  the  stock  in  security  or  satisfaction 
of  the  debts  for  which  he  was  bound,  on  the  ground  that  he  was  an 
officer  of  plaintiff. 

Wilson  had  the  right  fairly  to  prefer  defendant  in  making  payments 
of  his  indebtedness,  and  surely  defendant  had  the  right  to  accept 
such  payment.  The  fiduciary  relations  of  defendant  toward  the 
plaintiff,  which,  it  may  be  conceded,  demanded  uberrima  fides  in  the 
discharge  of  his  duties,  did  not  require  him  to  sacrifice  his  own  rights 
under  contracts,  or  appropriate  payments  voluntarily  made  upon 
claims  in  his  favor  to  indebtedness  held  by  the  bank. 

The  authorities  cited  by  plaintiff's  counsel  to  support  their  posi- 
tion, that  defendant  in  equity  could  not  accept  payment  from  Wilson, 
and  thereby  defeat  the  right  of  the  bank,  are  not  applicable  to  the 
case  made  by  the  testimony.  The  rules  recognized  by  them  are 
applicable  to  purchases  of  property  or  other  transactions  whereby 
those  discharging  duties  under  fiduciary  relations  realize  profits  or 
benefits  from  the  use  of  a  trust  fund.  Equity  holds  the  beneficiaries 
entitled  to  receive  such  profits  or  benefits. 

The  transfer  of  the  stock  to  defendant  did  not  conform  to  the 
requirements  of  the  regulations  adopted  by  the  corporation  upon 


FINANCING  THE  BUSINESS  UNIT  407 

that  subject.  We  have  seen  that  the  by-law  requiring  the  transfer 
to  have  the  assent  and  approval  of  the  directors  cannot  be  enforced 
to  defeat  defendant's  rights.  Failure  to  follow  other  requirements 
of  the  charter  or  by-laws  would  not,  in  the  absence  of  any  rights 
to  or  lien  upon  the  stock  held  by  plaintiff,  defeat  defendant's  right 
to  hold  the  stock,  and  enforce  a  transfer  in  proper  form.  As  between 
Wilson  and  defendant  the  transfer  passed  an  equitable  interest,  at  least, 
in  the  stock.  As  against  Wilson  this  equity,  it  cannot  be  doubted, 
may  be  enforced,  and  a  legal  transfer  based  thereon  may  be  obtained 
by  defendant.  The  bank,  as  we  have  seen,  having  no  lien  upon  or 
interest  in  the  stock,  can  offer  no  obstacle  to  the  enforcement  of  defend- 
ant's equitable  rights.  Defendant,  therefore,  must  be  regarded  in 
equity  as  the  owner  of  the  stock.  This  doctrine,  we  think,  is  the 
undoubted  rule  of  the  authorities.  See  Angell  and  Ames  on  Corpora- 
tions, sections  354,  355,  356,  and  575,  and  cases  cited. 

The  foregoing  discussion  disposes  of  all  questions  arising  in  the 
case.  The  decree  of  the  circuit  court  is  reversed,  and  the  cause  is 
remanded  for  a  decree  in  harmony  with  the  decision. 

Reversed. 
QUESTIONS 

1.  What  is  the  nature  of  a  share  of  stock  in  a  corporation  ?    What  functions 
does  it  perform  ?    What  degree  of  transferability  does  it  need  to  perform 
its  functions  well  ? 

2.  S,  owner  of  ten  shares  of  stock  evidenced  by  a  certificate  of  stock,  sold 
his  interest  in  the  corporation  to  B  without  indorsing  and  delivering  to 
B  his  certificate  of  stock.    What  is  the  legal  effect  of  the  transaction  ? 

3.  What  is  the  purpose  of  a  provision  that  a  stock  transfer  shall  not  be 
complete  until  entered  upon  the  books  of  the  corporation  ?    Is  it  valid  ? 

4.  What  is  the  purpose  of  a  provision  that  the  transfer  shall  not  be  complete 
until  approved  by  the  directors  of  the  corporation  ?    Is  it  valid  ? 

5.  How  is  a  complete  transfer  of  stock  ordinarily  accomplished  ? 

6.  How  can  a  partner  transfer  his  interest  in  the  partnership  ?    What  is 
the  legal  effect  of  such  transfer  ? 

WEST  NASHVILLE  PLANING-MILL  COMPANY  v. 
NASHVILLE  SAVINGS  BANK 

86  Tennessee  Reports  252  (1888) 

LURTON,  J.  The  complainant,  a  manufacturing  corporation 
created  under  the  provisions  of  the  General  Incorporation  Act  of 
1875,  sues  the  defendant  upon  a  stock  call  duly  made  for  twenty-five 


408  LAW  AND  BUSINESS 

shares  of  stock  now  standing  upon  the  stock  books  of  complainant 
in  the  name  of  Julius  Sax,  president.  This  stock  was  originally 
subscribed  by  one  J.  B.  Tucker,  who  paid  one-half  of  the  subscription 
price,  but  to  whom  was  issued  stock  certificates,  one  of  which  was  in 
the  following  words : 

Shares  $100  each. 

West  Nashville  Planing-Mill  and  Lumber  Company,  Nashville,  Tenn: 

This  is  to  certify  that  J.  B.  Tucker  is  entitled  to  thirty -five  shares, 
of  one  hundred  dollars  each,  in  the  capital  stock  of  the  West  Nashville 
Mill  and  Lumber  Company  of  Nashville,  subject  to  all  the  conditions  and 
stipulations  contained  in  their  articles  of  incorporation;  transferable  by 
him  or  his  attorney  only  on  surrender  of  this  certificate. 

In  testimony  whereof,  the  President  and  Secretary  of  said  company 
have  hereunto  subscribed  their  names. 

R.  F.  WOODARD,  President. 
T.  O.  TREANOR,  Secretary. 

The  defendant  bank,  without  notice  that  the  stock  was  not  in  fact 
paid  up,  and  in  good  faith,  made  a  loan  to  Tucker,  and  took  his  stock 
certificates  as  collateral  security,  with  usual  power  of  attorney  to 
transfer  same.  Subsequently  the  bank  surrendered  original  certifi- 
cates and  caused  new  certificates  to  issue  to  itself  identical  in  form 
with  the  original.  Under  these  facts  defendant  must  be  treated  as 
if  an  innocent  purchaser  for  value,  without  actual  notice  of  the  fact 
that  the  stock  was  subject  to  future  calls  for  unpaid  balance  of 
subscription  price.  A  number  of  defenses  to  this  suit  have  been  very 
ably  and  earnestly  pressed  by  the  solicitor  for  the  bank,  but  in  the 
view  we  take  of  the  case  we  need  only  determine  one  of  them.  The 
general  rule  concerning  the  effect  of  the  transfer  of  shares  in  a  corpora- 
tion is  that  such  transfer  operates  as  a  novation  of  the  contract  of 
membership.  The  transferer  ceases  to  be  a  shareholder,  and  the 
transferee  becomes  one.  The  first  is  ordinarily  relieved  from  all 
further  liability  to  contribute  capital,  and  loses  all  right  to  participate 
in  the  further  profit  or  management;  the  transferee  takes  the  place 
of  the  retiring  member,  and  by  implication  assumes  all  the  obligations 
which  rested  upon  the  former  as  a  member  of  the  company,  and 
ordinarily  becomes  liable  for  calls  to  the  same  extent  as  the  former 
owner  before  the  transfer  was  made.  Assuming  the  burdens,  he 
becomes  likewise  entitled  to  all  the  benefits  attaching  to  ownership 
of  the  shares*.  In  the  absence  of  charter  provisions  or  statutory 
regulations,  this  general  rule  is  almost  universally  recognized. 


FINANCING  THE  BUSINESS  UNIT  409 

Morawetz  on  Corporations  (26.  ed.),  section  159  and  authorities  cited. 

It  is  clearly  so  settled  in  this  state.  Jackson  v.  Sligo,  i  Lea,  213; 
Moses  v.  Ocoee  Bank,  i  Lea,  398. 

Stockholders  become  such  in  several  ways— either  by  original 
subscription,  or  by  assignment  of  proper  holders,  or  by  direct  purchase 
from  the  company.  It  is  not  at  all  essential  that  at  the  time  there  is 
an  original  subscription  there  shall  be  an  express  promise  to  pay  the 
subscription  price.  Of  tener  than  otherwise  there  is  none,  the  subscrip- 
tion being  a  simple  agreement  to  take  so  many  shares  of  stock.  By 
necessary  implication  there  arises  from  such  a  subscription  a  promise 
to  pay  the  par  value  of  such  stock,  upon  which  an  action  of  assumpsit 
lies.  E.  T.  &  R.  R.  v.  Gammon,  5  Sneed,  570.  ' 

The  Massachusetts  and  Maine  cases,  holding  an  express  promise 
necessary,  are  exceptional,  and  are  based  chiefly  upon  the  charter 
remedy  of  a  sale  of  the  stock  being  regarded  as  exclusive  in  the 
absence  of  an  express  agreement  to  pay.  The  liability  of  the  transferee 
of  unpaid  stock  is  expressly  put  upon  the  same  ground  of  an  agreement 
by  implication  from  the  acceptance  of  a  transfer  of  unpaid  stock, 
thus  coming  into  privity  with  the  corporation,  and  by  implication 
rendering  himself  liable  to  action  by  the  corporation  for  subsequent 
calls  for  unpaid  balance  of  subscription  price.  Morawetz  on  Corpora- 
tions (2d  ed.),  159;  Webster  v.  Upton,  91  U.S.,  65. 

The  Pennsylvania  cases,  holding  that  the  transferee  is  not  liable 
without  express  agreement,  are  exceptional,  and  do  not  commend 
themselves  to  us  by  their  reasoning. 

The  General  Incorporation  Act  of  1875,  under  which  complainant 
holds  its  charter,  contains  nothing  which  affects  the  question  of  the 
ordinary  liability  of  a  transferee  to  the  corporation.  Section  5  of 
that  act  only  provides  for  the  continued  liability  of  the  transferer 
in  the  case  mentioned. 

As  we  have  seen,  the  rule  which  makes  a  transferee  liable  for 
unpaid  calls  is  based  upon  the  implied  agreement  arising  where  one 
takes  shares  subject  to  calls,  and  causes  them  to  be  transferred  to 
himself.  But  where  the  purchaser  of  such  shares  buys  them  as  paid-up 
shares,  and  without  notice  that  in  fact  they  are  not  paid  up,  then  no 
implication  arises  of  an  agreement  to  pay  anything  to  the  corporation 
for  such  shares.  In  such  case  there  are  no  facts  from  which  to 
imply  an  agreement.  The  representation  made  by  the  corporation, 
either  upon  the  face  of  the  stock  certificate  or  by  its  officers,  that  the 
shares  are  paid  up  will,  as  between  the  corporation  and  such  trans- 


410  LAW  AND  BUSINESS 

feree,  prevent  any  contract  by  implication.  Morawetz  on  Corpora- 
tions, section  161;  Cook  on  Stocks,  sections  50,  257,  and  418. 

The  question  arising  upon  the  certificates  in  this  case  is  not  so 
easy  of  solution,  inasmuch  as  there  is  no  express  declaration  on  the 
face  of  it  that  the  shares  are  non-assessable  or  paid  up.  In  such  a 
case  the  question  is  a  perplexing  one  as  to  whether  the  purchaser  of 
such  shares  is  bound,  at  his  peril,  to  make  inquiry,  or  whether  he  is 
not  protected  by  the  want  of  notice. 

This  certificate  is  in  the  usual  commercial  form  of  certificates 
issued  for  shares  fully  paid  up.  There  is  no  intimation  upon  its  face 
that  it  is  not  what  it  appears  to  be.  The  corporation,  in  putting  such 
shares  upon  the  market,  has  put  it  in  the  power  of  the  subscriber  to 
sell  the  same  to  persons  innocent  of  the  true  fact.  Under  such 
circumstances,  ought  the  corporation  to  be  suffered  to  demand  from 
an  innocent  transferee,  for  value,  the  balance  of  the  subscription 
price?  Certificates  of  stock  are  quasi-negotiable  securities.  The 
vast  number  of  such  shares  daily  sold  upon  the  market  have  led  the 
courts  to  aid  their  commercial  and  negotiable  character  in  favor  of 
purchasers  without  notice  of  secret  liens.  Thus  an  assignment  of 
certificate  of  stock  is  held  to  pass  the  legal  title  to  such  shares  to 
the  assignee,  even  without  transfer  upon  stock  book  or  other  notice 
to  the  corporation.  Cornick  v.  Richards,  3  Lea,  i. 

Again,  this  court  held  that  if  the  pledgee  of  a  stock  certificate, 
with  blank  power  of  attorney,  subpledged  such  certificate  for  money 
loaned,  the  subpledgee,  if  ignorant  of  the  title  of  his  pledger,  will 
hold  the  certificate  as  against  the  true  owner.  Cherry  v.  Frost,  7  Lea,  i . 

In  view  of  the  important  character  assumed  by  shares  of  stock 
in  both  the  speculative  and  investment  markets,  and  in  view  of  the 
readiness  with  which  corporations  can  guard  themselves,  as  well  as 
purchasers  of  such  shares,  by  issuing  only  fully  paid  shares,  or  by 
expressing  upon  the  face  of  such  as  are  not  paid  up  the  fact  that  they 
are  subject  to  call  for  unpaid  subscription  price,  we  hold,  in  the 
interest  of  the  negotiability  of  such  shares  and  of  what  we  deem  a 
true  public  policy,  that  a  bona  fide  purchaser  of  a  certificate  of  stock, 
for  value,  and  without  notice,  either  from  the  face  of  the  certificate 
or  otherwise,  that  the  subscription  price  has  not  been  paid,  will  be 
protected  as  between  himself  and  the  corporation  negligently  issuing 
such  shares.  This  rule  we  regard  as  most  in  accord  with  the  usages, 
customs,  and  demands  of  commerce,  and  as  calculated  to  prevent  the 
assumption  of  unsuspected  liabilities  on  the  one  hand,  and  the  illegiti- 


FINANCING  THE  BUSINESS  UNIT  411 

mate  use  of  unpaid  shares  of  stock  on  the  other.  Cook  on  Stocks, 
sections  50  and  257. 

The  rule  is  in  analogy  with  the  principles  governing  contracts, 
and  there  can  be  no  implied  contract  to  pay  unpaid  calls  where  the 
purchaser  buys  what  he  is  entitled  to  believe  are  paid-up  shares. 

The  decree  of  the  chancellor  is  affirmed. 

QUESTIONS 

1.  D  transfers  his  stock  in  a  certain  corporation  to  B.    The  corporation 
refuses  to  issue  a  new  certificate  of  stock  to  B.    What  are  the  rights  of 
B,  if  any,  against  the  corporation? 

2.  The  corporation  declares  dividends  on  January  i.     D  sells  his  stock 
to  B  on  January  15.     Who  is  entitled  to  the  dividends  on  the  stock  in 
question  ? 

3.  On  January  i,  the  corporation  makes  a  call  for  20  per  cent  of  the  par 
value  of  the  stock.    On  January  1 5 ,  D  sells  his  stock  to  B .    On  February  i , 
the  corporation  makes  a  second  call  on  the  stock.    Who  is  liable  for 
these  calls  on  the  stock  in  question  ? 

4.  The  law  of  the  state  under  which  the  corporation  was  organized  provides 
that  stockholders,  in  addition  to  their  liability  for  the  par  value  of  their 
stock,  shall  be  liable  to  creditors  in  an  amount  equal  to  the  par  value 
of  the  stock.    D  transfers  his  stock  to  B.    What  are  the  rights  of 
creditors,  if  any,  against  D  ?  against  B  ? 

5.  The  corporation  in  excess  of  its  powers  purchases  a  tract  of  land. 
Subsequently  D  sells  his  stock  to  B.     B  brings  an  action  to  have  the 
ultra  vires  transaction  set  aside.     What  decision  ? 

EAST  BIRMINGHAM  LAND  COMPANY  v.  DENNIS 

85  Alabama  Reports  585  (1888) 

(Reprinted,  supra,  Vol.  II,  p.  465) 

QUESTIONS 

1.  What  was  the  issue  involved  in  this  case?     How  was  the  issue  decided ? 
What  rule  of  law  can  be  deduced  from  the  decision  ? 

2.  S,  owner  of  ten  shares  of  stock  in  the  P  Company,  indorses  his  certificate 
of  stock  in  blank  and  loses  it.    T  finds  and  sells  it  to  B,  a  bona  fide 
purchaser.    What  are  S's  rights  against  B  ? 

3.  S  delivers  the  certificate  of  stock,  indorsed  in  blank,  to  A  and  directs 
him  to  pledge  it  with  B  as  security  for  a  loan.     A  sells  it  as  his  own  to 
B.    What  are  S's  rights  against  B  ? 

4.  In  Question  i,  B  surrenders  the  certificate  of  stock  to  the  corporation 
and  receives  in  exchange  for  it  a  new  certificate  of  stock.    What  are 
the  rights  of  S  and  B  with  respect  to  the  stock  ? 


412  LAW  AND  BUSINESS 

5.  B  sells  the  new  certificate  to  C,  a  bona  fide  purchaser.    What  are  the 
rights  of  the  parties  with  respect  to  the  stock  ? 

6.  Does  a  certificate  of  stock  possess  as  high  a  degree  of  transferability  as  a 
bill  of  exchange?    To  perform  its  functions  does  it  need  to  possess  as 
high  a  degree  of  transferability  as  a  bill  of  exchange  ? 

EDELSTEIN  v.  SCHULER  AND  COMPANY 

Law  Reports  2  King's  Bench  Division  144  (1902) 

(Reprinted,  supra,  Vol.  II,  p.  472) 

QUESTIONS 

1.  What  was  the  issue  involved  in  this  case?    How  was  the  issue  decided? 
What  rule  of  law  can  be  deduced  from  the  decision  ? 

2.  What  degree  of  transferability  does  a  bond  possess? 

3.  Does  the  ordinary  bond  come  within  the  provisions  of  the  Negotiable 
Instruments  Act  ? 

4.  H  is  the  holder  of  a  bond  payable  to  the  " registered  holder."     Is  it 
transferable  by  indorsement  and  delivery  ?    If  not,  how  is  it  transfer- 
able? 

5.  The  M  Company  issues  a  bond  payable  to  the  "order  of  the  registered 
holder."    Is  this  instrument  transferable  by  indorsement  and  delivery  ? 

b)     Participation  in  Management 

THOMPSON  v.  BLAISDELL 

93  New  Jersey  Law  Reports  31  (1919) 

SWAYZE,  J.  This  is  a  summary  investigation  of  a  corporate 
election  under  section  42  of  the  Corporation  Act.  The  controversy 
turns  on  the  right  to  vote  two  hundred  and  forty-two  shares  standing  in 
the  name  of  Albert  Kumpel.  This  right  was  denied  by  the  inspectors 
at  the  election.  These  shares,  if  voted,  would  have  changed  the 
result.  Theodore  Kumpel  sought  to  vote  them  by  virtue  of  a  proxy 
from  Albert.  It  is  not  denied  that  Albert  appeared  as  owner  on 
the  books  of  the  company  on  the  day  of  the  election,  or  that  the 
proxy  was  in  proper  form  and  properly  executed.  On  the  face  of  the 
papers  Theodore  was  entitled  to  vote  the  shares.  Under  the  rule  of 
Downing  v.  Potts,  23  N.J.L.  66,  and  the  St.  Lawrence  Steamboat  Co. 
Case  44  Id.  529,  the  action  of  the  inspectors  was  erroneous,  and  the 
election  ought  to  be  set  aside  or  the  contesting  party  put  in  office. 
The  incumbents  rely  not  on  any  defect  in  the  record  title  to  the 
stock  or  in  the  proxy,  but  on  a  situation  disclosed  by  the  facts  of 


FINANCING  THE  BUSINESS  UNIT  413 

the  case  as  established  by  evidence  aliunde  and  not  legally  before  the 
inspectors  of  election.  These  facts  are  supposed  to  require  the  court 
to  establish  the  right  of  the  incumbents,  pursuant  to  the  injunction 
of  section  42  of  the  act  requiring  us  to  give  such  relief  in  the  premises 
as  right  and  justice  may  require. 

The  facts  are  that  Albert  gave  the  proxy  to  Theodore  on  March  24; 
that  afterward,  on  April  5,  Theodore  determined  to  buy  the  stock 
at  Albert's  request  and  sent  Albert  a  check  for  the  purchase  price. 
Albert  signed  a  transfer,  but  Theodore  did  not  register  the  transfer 
on  the  books  of  the  company  and  the  stock  still  stood  in  Albert's 
name  on  May  13,  the  day  of  the  election.  His  reason  seems  to  have 
been  that  there  was  a  real  or  supposed  right  of  pre-emption  in  the 
company  and  he  desired  to  avoid  any  question  as  to  his  title  to  the 
stock.  It  is  now  argued  that  the  proxy  was  revoked  by  the  sale  to 
Theodore.  Stock  is  often  sold  while  the  transfer  books  are  closed, 
and  it  would  be  a  manifest  injustice  to  deprive  the  vendee  of  the  right 
to  vote,  which  the  act  is  at  some  pains  to  secure  him,  because  he  has 
bought  within  twenty  days  next  preceding  election.  Section  36 
secures  each  stockholder  the  right  to  vote;  it  does  not  disfranchise 
stock  which  has  been  sold  within  twenty  days  next  preceding  the  elec- 
tion, but  only  stock  which  has  been  transferred  on  the  books.  Whether 
the  vendee  shall  be  disfranchised  is  thus  made  to  depend  on  his  own 
action  or  inaction.  There  is  nothing  in  the  language  to  prevent  the 
vendee,  by  agreement  with  the  vendor,  from  securing  his  right  to 
vote  by  means  of  a  proxy,  although  not  yet  registered  as  a  stockholder. 
The  law  was  long  ago  established  in  New  York  under  similar  legislation 
(People  v.  Tibbits,  4  Cow.  385),  and  has  more  recently  been  followed 
In  Re  Argus  Co.,  138  N.Y.  557,  579;  43  N.E.  Rep.  388.  This  rule  is. 
in  harmony  with  the  principle  that  requires  a  trustee  in  case  of  a  dry 
trust  to  give  a  proxy.  American  National  Bank  v.  Oriental  Mills, 
17  R.I.  551;  23  Atl.  Rep.  795.  Granting  that  the  sale  is  a  technical 
revocation  of  the  proxy,  it  would  be  idle  to  require  the  former  owner, 
now  become  a  trustee  of  a  dry  trust  for  the  unregistered  vendee,  to 
execute  a  new  proxy  where  both  he  and  his  vendee  are  content  with 
the  control  of  the  voting  power  given  by  the  title  shown  on  the  transfer 
books  accompanied  by  the  proxy.  The  rule  is  also  in  harmony  with 
the  policy  that  entitles  every  stockholder  to  the  benefit  of  the  vote  of 
every  other  stockholder  and  entrusts  the  voting  power  to  the  beneficial 
owner.  A  distinction  is  made  by  the  statute,  as  Mr.  JUSTICE  DEPUE 
pointed  out  in  the  St.  Lawrence  Steamboat  Co.  case,  between  the 


414  LAW  AND  BUSINESS 

qualification  for  voting  at  the  stockholders'  meeting — registration 
on  the  transfer  books  only,  and  the  qualification  of  director — bona 
fide  ownership  of  stock. 

A  man  may  vote,  although  not  a  bona  fide  owner  of  stock,  and 
may  vote  by  proxy.  We  see  no  reason  why  a  vendor  who  is  still 
registered  as  a  stockholder  may  not  vote  by  proxy.  The  case  is  still 
stronger  where  the  proxy  is  held  by  the  vendee. 

We  are  hot  now  dealing  with  technical  legal  rights.  Those  rights 
at  the  time  of  the  election  were  with  Theodore  Kumpel.  The  inspec- 
tors could  not  go  outside  the  face  of  the  papers.  We  are  dealing  with 
a  question  of  right  and  justice  under  the  mandate  of  the  statute,  and 
the  answer  to  the  question  depends  on  the  beneficial  title  to  the  stock. 
If  there  was  no  right  of  pre-emption  in  the  corporation  Theodore 
Kumpel  was  the  beneficial  owner  of  the  stock,  as  well  as  the  person 
entitled  to  vote  it  on  the  fact  of  the  books  and  the  proxy.  Jf  there 
was  a  right  of  pre-emption,  the  legal  title  was  still  in  Albert,  the  sale 
had  never  been  perfected,  and  the  proxy  had  not  been  revoked.  As 
the  right  of  pre-emption  seems  to  be  a  disputed  question,  we  think 
we  ought  not  now  establish  the  title  of  the  contestants  and  oust  the 
incumbents.  Instead  of  that  we  order  a  new  election  which,  if  neces- 
sary, may  be  conducted  under  the  direction  of  a  Supreme  Court 
commissioner. 

We  have  passed  by  the  suggestion  that  there  was  unanimous 
consent  that  the  two  hundred  and  forty-two  shares  should  be  dis- 
franchised. The  evidence  is  not  persuasive  to  that  effect.  We 
cannot,  for  instance,  assume  that  the  seventy-eight  shareholders 
represented  by  proxy  assented  to  the  disfranchisement,  and  the 
minutes  show  only  an  assent  by  "both  sides,"  which  is  far  from 
showing  unanimous  consent  even  of  stockholders  present,  since  some 
may  not  have  taken  sides. 

QUESTIONS 

1.  S,  owner  of  stock  in  the  M  Company,  sells  his  stock  to  B  and  delivers 
to  him  a  certificate  of  stock  properly  indorsed.    Who  is  entitled  to  vote 
this  stock  before  a  transfer  is  made  on  the  books  of  the  corporation  ? 

2.  S  pledges  his  stock  to  C  as  security  for  a  debt.    Who  is  entitled  to  vote 
the  stock  ? 

3.  Do  bondholders  of  a  corporation  have  the  right  to  vote?    Do  holders 
of  preferred  stock  have  the  right  to  vote  ? 

4.  Under  what  circumstances  is  the  holder  of  stock  entitled  to  vote  by 
proxy  ? 


FINANCING  THE  BUSINESS  UNIT  415 

5.  What  is  meant  by  cumulative  voting  ?    What  is  the  purpose  of  permitting 
a  stockholder  to  cumulate  his  votes  ? 

6.  The  M  Company,  having  a  capital  stock  of  $75,000,  divided  into  shares 
of  the  par  value  of  $100,  under  authority  of  law  increases  its  capital 
stock  to  $100,000.     S,  owner  of  a  hundred  shares  of  stock  in  the  corpora- 
tion, demands  the  right  to  subscribe  for  stock  in  the  new  issue.    The 
corporation  ignores  his  demand.    What  are  S's  rights,  if  any,  against 
the  corporation  ? 

7.  Does  a  partner  have  a  right  in  his  firm  comparable  to  the  right  of  a 
stockholder  to  vote  at  stockholders'  meetings?    If  so,  does  the  right 
depend  upon  the  quantum  of  his  interest  in  the  firm? 

SMITH  v.  SAN  FRANCISCO  AND  NORTHERN  PACIFIC 
RAILWAY  COMPANY 

115  California  Reports  584  (1897) 

Smith,  the  plaintiff  herein,  Foster  and  Markham  purchased  stock 
in  the  Northern  San  Francisco  and  Pacific  Railway  Company,  the 
defendant,  under  an  agreement  that  the  stock  should  be  voted  as  a 
unit  for  a  period  of  five  years.  During  the  five-year  period,  in  view 
of  an  approaching  meeting  for  the  election  of  directors,  a  vote  was 
taken  between  the  three  as  to  how  the  stock  should  be  voted.  At 
the  meeting,  Smith,  dissatisfied  with  the  arrangement  in  question, 
attempted  to  vote  the  stock  standing  in  his  own  name.  Foster 
offered  to  vote  all  the  stock  according  to  their  ballot.  The  vote 
of  Foster  was  accepted.  This  was  an  action  by  Smith  brought  under 
the  Code  to  determine  the  validity  of  the  election.  He  alleged  that 
if  his  vote  had  been  accepted  the  election  would  have  been  otherwise. 
The  trial  court  rendered  judgment  in  favor  of  the  plaintiff. 

HARRISON,  J.  The  instrument  executed  between  the  parties 
must  be  held  to  be  a  proxy,  and  to  authorize  the  vote  of  42,000  shares 
of  the  stock  to  be  cast  in  accordance  with  the  determination  of  the 
majority  of  the  parties  thereto;  and,  if  it  was  made  upon  a  consider- 
ation sufficient  to  bind  the  parties  to  its  enforcement,  it  must  be 
regarded  as  still  operative.  One  of  the  inducements  for  the  purchase 
of  the  stock,  and  under  which  the  parties  entered  into  the  agreement, 
was  that  the  shares  should  be  voted  in  one  body,  and  held  for  five 
years  as  a  unit.  It  is  immaterial  that  the  voting  agreement  was  not 
reduced  to  writing  and  executed  until  after  the  bid  had  been  made 
for  the  stock.  It  was  so  executed  before  the  parties  thereto  had 
completed  the  purchase,  and  become  the  owners  of  the  stock  by 


416  LAW  AND  BUSINESS 

paying  the  purchase  price.  Nor  is  the  validity  of  the  agreement  or 
the  effect  of  its  terms  different  by  reason  of  different  certificates 
having  been  issued  in  the  names  of  the  several  parties  to  the  transac- 
tion, rather  than  in  the  name  of  one  of  them.  The  agreement  between 
them  was  with  reference  to  the  42,000  shares  of  stock,  that  it  should 
be  voted  as  a  unit,  and  the  purpose  of  the  agreement  was  the  econom- 
ical management  of  the  road,  and  to  prevent  irresponsible  persons 
from  getting  control. 

It  was  within  the  powers  of  the  parties  to  contract  in  reference 
to  this  property  as  fully  as  with  regard  to  any  other  property.  They 
were  at  liberty  to  make  as  a  condition  of  their  purchase  that  its 
management  should  be  held  by  either  of  them,  or  by  a  majority  of 
the  three,  and  the  terms  of  the  agreement  for  such  purchase  could  not 
be  repudiated  by  either  after  the  purchase  had  been  made.  It  may 
be  assumed  that  neither  of  the  parties  would  have  entered  into  the 
transaction  or  agreed  upon  the  purchase  of  the  stock  except  upon 
these  conditions  and  it  must  be  held  that  each  contributed  his  money 
to  the  purchase  of  the  stock  upon  the  promise  made  to  him  by  the 
others.  There  was  thus  a  sufficient  consideration  for  the  agreement 
granting  the  right  to  vote  the  stock.  It  was  in  the  nature  of  a  power 
coupled  with  an  interest,  and,  being  given  for  a  valuable  consideration, 
could  not  be  revoked  at  the  pleasure  of  either.  Hey  v.  Dolphin,  92 
Hun,  230,  36  N.Y.  Supp.  627. 

Although  the  court,  in  excluding  the  evidence,  assumed  that 
the  instrument  was  valid,  counsel  for  respondents  have  presented  an 
argument  in  support  of  their  further  objection  thereto  that  the  instru- 
ment is  invalid  by  reason  of  being  against  public  policy;  and  it  there- 
fore becomes  necessary  to  consider  this  objection,  inasmuch  as  the 
action  of  the  court,  rather  than  its  reason  for  so  acting,  is  to  be 
reviewed;  for,  if  the  instrument  is  invalid,  the  refusal  of  the  court 
to  allow  any  effect  to  be  gained  from  its  exercises  was  proper. 

''Public  policy"  is  a  term  of  vague  and  uncertain  meaning,  which 
it  pertains  to  the  law-making  power  to  define,  and  courts  are  apt  to 
encroach  upon  the  domain  of  that  branch  of  the  government  if  they 
characterize  a  transaction  as  invalid,  because  it  is  contrary  to  public 
policy,  unless  the  transaction  contravenes  some  positive  statute  or 
.some  well-established  rule  of  law.  SIR  GEORGE  JESSEL  as  master 
of  the  rolls,  said  in  Besant  v.  Wood,  12  Ch.  Div.  505,  that  public 
policy  is  "to  a  great  extent  a  matter  of  individual  opinion,  because 
what  one  man  or  one  judge  might  think  against  public  policy  another 


FINANCING  THE  BUSINESS  UNIT  417 

might  think  altogether  excellent  public  policy."  And  in  another  case 
(Registering  Co.  v.  Simpson,  L.R.  19  Eq.  465),  the  same  jurist  said: 
"  If  there  is  one  thing  which,  more  than  another,  public  policy  requires, 
it  is  that  men  of  full  age  and  competent  understanding  shall  have  the 
utmost  liberty  of  contracting  and  that  their  contracts,  when  entered 
into  freely  and  voluntarily,  shall  be  held  sacred,  and  shall  be  enforced 
by  courts  of  justice." 

It  is  not  in  violation  of  any  rule  or  principle  of  law  for  stockholders 
who  own  a  majority  of  the  stock  in  a  corporation  to  cause  its  affairs 
to  be  managed  in  such  a  way  as  they  may  think  to  have  been  calcu- 
lated to  further  the  ends  of  the  corporation,  and  for  this  purpose  to 
appoint  one  or  more  proxies,  who  shall  vote  in  such  a  way  as  will 
carry  out  their  plan.  Nor  is  it  against  public  policy  for  two  or  more 
stockholders  to  agree  upon  a  course  of  corporate  action,  or  upon  the 
officers  whom  they  will  elect;  and  they  may  do  this  either  by  them- 
selves or  through  their  proxies,  or  they  may  unite  in  their  appointment 
of  a  single  proxy  to  effect  their  purpose.  Any  plan  of  procedure  they 
may  agree  upon  implies  a  previous  comparison  of  views,  and  there  is 
nothing  illegal  in  an  agreement  to  be  bound  by  the  will  of  the  majority 
as  to  the  means  by  which  the  result  shall  be  reached.  If  they  are  in 
accord  as  to  the  ultimate  purpose,  it  is  but  reasonable  that  the  will  of  the 
majority  should  prevail  as  the  mode  by  which  it  may  be  accomplished. 
It  would  not  be  an  illegal  agreement  if  articles  of  partnership  should 
provide  that  stock  in  a  corporation  owned  by  the  partnership,  though 
standing  in  the  individual  names  of  the  partners,  should  be  voted  by 
one  of  its  members;  and  it  is  no  more  against  public  policy  for  such 
an  agreement  to  be  entered  into  between  stockholders  whose  interests 
in  the  stock  are  separate  than  where  their  interests  are  joint. 

Viewed  from  considerations  of  public  policy  only,  it  is  immaterial 
whether  such  an  agreement  is  made  by  the  members  of  an  existing 
partnership,  which  owns  the  shares,  or  in  pursuance  of  an  agreement 
by  two  or  more  persons  to  form  a  partnership  for  their  purchase, 
or  to  purchase  them  for  their  joint  account,  or  as  one  of  the  terms  of 
an  agreement  for  their  purchase  by  persons  who  contemplate  no 
relation  to  each  other,  further  than  that  of  owning  stock  in  the  same 
corporation.  Such  agreement  would  in  any  case  be  outside  the 
corporation,  and  disconnected  with  the  interest  of  every  other  stock- 
holder and  in  either  case  the  same  rules  would  control.  Whether 
such  an  agreement  is  illegal,  so  that  any  action  or  vote  under  it  can 
be  set  aside,  or  is  of  such  a  character  that  it  will  not  be  enforced,  will 


418  LAW  AND  BUSINESS 

depend  upon  the  object  with  which  it  is  made,  or  the  acts  which  are 
done  under  it,  and  will  be  governed  by  other  rules  of  law. 

In  cases  of  "  voting  trusts,"  where  the  owners  of  stock  transfer 
the  shares  to  a  trustee  with  authority  to  vote  at  elections  according 
to  the  direction  of  a  majority  of  those  holding  trust  certificates,  and 
the  only  consideration  for  such  transfer  and  agreement  is  the  mutual 
promises  of  the  several  stockholders  it  has  been  held  that  any  stock- 
holder may  revoke  his  agreement  and  withdraw  his  stock  at  will; 
and  it  is  also  held  that  stockholders  who  become  such  after  an 
agreement  of  this  nature  is  entered  into  are  not  bound  by  its 
terms,  but  will  hold  their  shares  freed  from  the  limitations  of  the 
agreement. 

The  agreement  in  question  cannot  be  regarded  as  illegal  by  reason 
of  being  in  restraint  of  trade.  The  rule  invalidating  contracts  in 
restraint  of  trade  does  not  include  every  contract  of  an  individual 
by  which  his  right  to  dispose  of  his  property  is  limited  or  restrained. 
Section  1673,  Civ.  Code,  makes  void  every  contract  by  which  one  is 
restrained  from  "exercising  a  lawful  profession,  trade,  or  business," 
except  in  certain  instances.  But  this  is  far  different  from  a  contract 
limiting  his  right  to  dispose  of  a  particular  piece  of  property  except 
upon  certain  conditions.  As  the  owner  of  property  has  the  right  to 
withhold  it  from  sale,  he  can  also,  at  the  time  of  its  sale  impose  condi- 
tions upon  its  use  without  violating  any  rule  of  public  policy;  and 
there  is  nothing  inconsistent  with  public  policy  for  two  or  more 
persons  who  contemplate  purchasing  certain  property  to  agree  with 
each  other,  as  a  condition  of  the  purchase,  that  neither  will  dispose  of 
his  share  within  a  limited  period,  or  for  less  than  a  fixed  sum,  or  except 
upon  certain  limitations.  They  have  the  same  right  to  contract 
with  reference  to  the  terms  under  which  they  will  hold  or  dispose  of 
the  property  after  it  shall  have  been  purchased,  as  they  have  to  agree 
upon  any  other  terms  upon  which  the  purchase  shall  be  made;  and  they 
no  more  violate  a  rule  of  public  policy  in  making  such  agreement  a  con- 
sideration of  their  purchase  than  would  two  or  more  partners,  who 
should  purchase  property  for  partnership  purposes,  and  agree  that  it 
should  not  be  disposed  of  unless  their  vendee  would  assent  to  certain 
conditions  regarding  its  use.  Those  terms  enter  into  and  form  a 
part  of  the  consideration  for  the  agreement  or  purchase,  and  are  as 
binding  and  enforceable  as  any  other  terms  of  the  agreement.  Trust 
Co.  v.  Abbott,  162  Mass.  148,  38  N.E.  432,  27  L.R.A.  271;  Hodge  v. 
Sloan,  107,  N.Y.  244,  17  N.E.  335,  i  Am.  St.  Rep.  816;  Williams  v. 


FINANCING  THE  BUSINESS  UNIT  419 

Montgomery,  148  N.Y.,  519,  43  N.E.  57;    Matthews  v.  Associated 
Press  136  N.Y.  333,  32  N.E.  981,  32  Am.  St.  Rep.  741. 

The  contract  in  Fisher  v.  Bush,  35  Hun  (N.Y.)  641,  was  held  to 
be  invalid  for  want  of  any  other  consideration  than  the  mutual 
promise  of  the  parties;  but  it  was  said  in  that  case: 

If  these  parties  and  their  associates  were  the  promoters  of  this  corpora- 
tion, then,  doubtless  they  could  have  entered  into  a  valid  agreement  regula- 
ting a  sale  of  the  same,  and  requiring  the  owners  to  hold  them  from  market 
for  a  reasonable  and  definite  period  of  time,  and  thus  forbidding  a  sale  by 
either  of  his  interest  to  one  against  whom  his  associates  might  have  a 
reasonable  objection.  M  off  ait  v.  Farquhar,  7  Ch.  Div.  591;  reported  in 
23  Moak  Eng.  R.  731.  A  stipulation  of  that  character  would  not  be  illegal, 
as  against  public  policy,  as  it  would  be  simply  a  provision,  assented  to  by 
all,  that  the  new-comer  into  the  business  transaction  should  be  with  the 
approval  of  the  other  joint  owners. 

Neither  is  it  illegal  or  against  public  policy  to  separate  the  voting 
power  of  the  stock  from  its  ownership.  The  statute  authorizes  the 
stockholder  to  vote  by  proxy,  and  it  was  held  in  People's  Home 
Savings  Bank  v.  Superior  Court  of  City  and  County  of  San  Francisco, 
104  Cal.  649,  38  Pac.  452,  29  L.R.A.  844,  13  Am.  St.  Rep.  147,  that 
a  by-law  restricting  the  selection  of  proxies  to  stockholders  was 
invalid,  that  the  statute  places  no  limitation  upon  the  right  of 
selection  and  that  a  stockholder  may  appoint  as  his  proxy  one  who 
is  an  entire  stranger  to  the  corporation.  The  right  to  appear  by  proxy 
implies,  of  itself,  that  the  voting  power  may  be  separated  from  the 
ownership  of  the  stock;  and,  unless  the  authority  of  the  proxy  is 
limited  by  the  terms  of  his  appointment,  he  is  necessarily  required 
to  use  his  own  discretion  in  any  vote  that  he  gives.  Being  the 
agent  of  the  stockholder,  he  is  required  to  exercise  this  discretion  in 
behalf  of  his  principal;  but  he  is  at  liberty  to  use  his  own  discretion  as 
to  the  means  by  which  his  principal's  interest  will  be  best  subserved. 
The  cases  in  which  it  has  been  said  that  the  stockholder  could  not 
divest  himself  of  the  voting  power  of  his  stock,  were  cases  which 
involved  either  the  sufficiency  of  the  agreement  by  which  the  voting 
power  was  transferred,  or  the  validity  of  the  purpose  for  which  the 
power  was  to  be  exercised.  The  proxy  must  exercise  a  discretion  of 
the  same  nature  as  that  which  the  stockholder  is  authorized  to 
exercise,  and  an  authority  to  do  otherwise  would  be  invalid;  but 
the  authority  to  exercise  a  discretion  differs  from  an  authority  to 
perform  a  particular  act. 


420  LAW  AND  BUSINESS 

Under  an  appointment  without  words  of  limitation,  the  proxy 
may  act  against  the  interests  of  the  stockholder,  or  even  against  the 
interests  of  the  corporation  and  the  corporation,  as  well  as  the  stock- 
holder, will  be  bound  by  his  act  as  fully  as  if  the  stockholder  had  acted 
in  person;  while,  if  the  authority  had  been  directed  in  terms  to  that 
act,  it  might  have  been  invalid.  The  distinction  is  that  between  an 
unlawful  exercise  of  a  lawful  power  and  the  attempt  to  authorize  the 
exercise  of  an  unlawful  power.  The  question  has  been  presented 
in  cases  of  voting  trusts,  but  an  examination  of  these  cases  will  show 
that  the  question  has  arisen  either  when  the  authority  was  expressly 
given  to  carry  out  some  illegal  purpose,  or,  when  having  been  given 
without  any  consideration  though  purporting  to  be  for  a  definite 
term,  subsequent  owners  of  the  stock  have  sought  to  revoke  it  before 
the  expiration  of  the  term.  Shepaug  Voting-Trust  Cases,  60  Conn. 
553,  24  Atl.  32,  sometimes  reported  under  the  name  of  Bostwiok  v. 
Chapman;  White  v.  Tire  Co.,  52  NJ.  Eq.  178,  28  Atl.  75. 

We  have  been  cited  to  no  instance  where  the  purpose  of  a  proxy 
given  upon  a  sufficient  consideration  was  lawful,  and  the  person  by 
whom  the  proxy  was  created  continued  to  be  the  owner  of  the  stock , 
in  which  the  agreement  has  been  held  invalid.  The  stockholder  cannot 
separate  the  voting  power  from  his  stock  by  selling  his  right  to  vote 
for  a  consideration  personal  to  himself  alone,  any  more  than  he  could 
agree,  for  the  same  consideration,  to  cast  the  vote  himself;  and  an 
agreement  with  others  to  appoint  a  proxy  upon  the  same  considera- 
tions would  be  equally  invalid.  In  Cone  v.  Russell,  48  NJ.  Eq., 
208,  21  Atl.  847,  an  agreement  by  the  purchaser  of  stock  to  give 
to  other  stockholders  his  irrevocable  proxy,  for  the  purpose  of  securing 
and  maintaining  the  control  of  the  company,  was  held  invalid,  for 
the  reason  that  it  was  one  of  the  terms  of  the  agreement  that  the 
directors  to  be  elected  under  its  provisions  should  employ  the  one 
giving  the  proxy  at  a  fixed  salary  during  its  existence.  Such  an  agree- 
ment was  held  to  operate  as  an  inducement  to  elect  directors  who 
would  not  act  disinterestedly  for  the  benefit  of  all  the  stockholders, 
but  rather  to  promote  the  interest  of  the  parties  to  the  agreement 
alone,  and  was  therefore  void,  as  being  against  public  policy.  The 
court,  however,  said:  "This  conclusion  does  not  reach  so  far  as  to 
necessarily  forbid  all  pooling  or  combining  of  stock,  where  the  object 
is  to  carry  out  a  particular  policy  with  the  view  to  promote  the  best 
interests  of  all  the  stockholders." 


FINANCING  THE  BUSINESS  UNIT  421 

It  was  upon  this  principle  that  the  agreements  in  Hafer  v.  New 
York  etc.  Railway  Co.,  14  Wkly.  Law  Bull.  (Ohio)  68,  Guernsey  v.  Cook, 
120  Mass.  501,  and  Fennessy  v.  Ross,  5  App.  Div.  342,  39  N.Y.  Supp. 
323,  were  held  invalid.  The  same  principle  was  declared  in  Gage  v. 
Fisher,  5  N.D.  297,  65  N.W.  809,  31  L.R.A.  557.  In  Railroad  Co.  v. 
Nicholas,  98  Ala.  92,  12  South.  723,  the  court  held  that  there  was 
nothing  illegal  or  contrary  to  public  policy  in  separating  the  voting 
power  of  the  stock  from  its  ownership,  saying:  "Where  a  proxy  is 
duly  constituted,  and  the  power  of  the  appointment  is  without  limita- 
tion, the  vote  cast  by  the  proxy  binds  the  stockholders,  whether 
exercised  in  behalf  of  his  interest  or  not,  to  the  same  extent  as  if  the 
vote  had  been  cast  by  the  stockholder  in  person.  The  invalidity  of 
acts  of  this  character  by  a  proxy  rightly  understood,  is  not  made  to 
rest  upon  the  ground  that  there  has  been  separation  of  the  voting  power 
from  the  stockholders,  but  because  of  the  unlawful  purpose  for  which 
the  proxy  was  appointed,  or  the  unlawful  end  attempted  to  be  effected 
by  the  exercise  of  the  voting  power." 

The  judgment  and  order  denying  a  new  trial  are  reversed. 

QUESTIONS 

1.  What  test  did  the  court  announce  in  this  case  for  determining  whether 
or  not  the  arrangement  in  question  was  legal  ? 

2.  A,  B,  and  C,  owners  of  a  majority  of  the  stock  of  the  X  Company, 
enter  into  an  agreement  by  which  A  is  to  vote  the  stock  as  a  unit  for  a 
period  of  five  years.    The  purpose  of  the  arrangement  is  to  secure 
unity  of  control  so  that  the  corporation  can  make  profits  which  it 
had  theretofore  been  unable  to  do.    Discuss  the  validity  of  the  arrange- 
ment. 

3.  In  the  foregoing  case,  the  arrangement  gives  A  the  right  to  vote  the  stock 
for  a  period  of  twenty-five  years.    Discuss  the  validity  of  the  arrange- 
ment. 

4.  The  purpose  of  the  agreement  is  to  secure  control  of  the  corporation  and 
gradually  go  out  of  business  contrary  to  the  will  of  the  minority.    Discuss 
the  validity  of  the  agreement. 

5.  A,  B,  and  C,  under  a  mutual  agreement,  transfer  their  stock  to  T,  a 
representative  of  the  creditors  of  the  corporation,  for  a  period  of  five 
years.    T  is  to  hold  the  stock  in  trust  for  the  stockholders  and  vote 
it  in  the  interest  of  an  economical  administration  of  the  corporation. 
Is  there  any  way  for  A  to  get  back  his  stock  before  the  end  of  five 
years  ? 


422  LAW  AND  BUSINESS 

c)     Participation  in  Profits 

HUNTER  v.  ROBERTS,  THROP  AND  COMPANY 
83  Michigan  Reports  63  (1890) 

CHAMPLIN,  C.  J.  Roberts,  Throp  &  Co.  is  a  manufacturing 
corporation  organized  under  the  laws  of  the  state  of  Michigan,  and 
engaged  in  the  manufacture  of  threshing-machines  and  other  agri- 
cultural implements.  Complainant's  intestate  was  a  stockholder  in 
the  corporation,  and  she  has  filed  the  bill  of  complaint  in  this  case  to 
compel  the  directors  of  the  corporation  to  declare  and  pay  a 
dividend.  The  bill  of  complaint  was  dismissed  by  the  court  below, 
who  filed  a  written  opinion  in  the  cause,  which  has  been  returned 
with  the  record. 

The  corporation  was  organized  in  1875,  with  an  authorized  capital 
of  $250,000,  only  $80,  ooo  of  which  was  paid  in.  It  did  business  until 
March,  1881,  when  a  change  was  made  in  its  stockholders,  one  of  the 
Roberts  purchasing  the  Throp  interest,  which  was  represented  by 
i, 600  shares  at  $25  each,  for  which  he  paid  $60,000.  At  this  time  the 
notes  and  money  were  divided,  leaving  the  corporation  without 
available  capital  or  means  to  carry  on  the  business.  In  this  crisis 
the  corporation  resorted  to  borrowing,  and  from  that  time  until 
December  12  following  it  had  borrowed  money  and  obtained  credit 
to  the  amount  of  $37,903.71,  of  which  $26,756.14  was  represented  by 
bills  payable,  and  the  balance  in  open  account.  The  sales  of  its 
manufactured  articles  have  been  made  in  several  states  from  Michigan 
to  Texas  and  the  Dakotas,  and  are  made  through  agents  or  traveling 
salesmen,  and  mostly  upon  a  credit  of  from  three  to  four  years. 
Notes  of  the  purchasers  have  been  taken  upon  sales,  which,  from  the 
length  of  time  and  the  distance  of  the  parties,  have  not  been  bankable 
paper,  and  the  corporation  has  been  obliged  to  be  a  steady  borrower 
and  purchaser  upon  credit  year  by  year.  In  1882,  its  bills  and 
accounts  payable  amounted  at  the  close  of  business,  December  12, 
to  $72,954.54;  in  1883,  to  $59,787.65;  in  1884,  to  $89,989.91;  in  1885, 
to  $69,880.46;  in  1886,  to  $84,088.15;  in  1887,  to  $81,006.91.  These 
items  show  that  it  required  a  large  amount  of  ready  money  to  carry 
on  the  business,  and  it  was  laid  out  in  merchandise  purchased,  addi- 
tional tools  and  machinery,  and  the  expenses  necessary  to  the  manu- 
facture and  sale  of  the  manufactured  product,  as  shown  in  the  respec- 
tive accounts  upon  the  books  of  the  corporation.  During  the  same 
time,  the  corporation  steadily  increased  its  bills  receivable,  which, 


FINANCING  THE  BUSINESS  UNIT  423 

added  to  the  debts  due  to  the  corporation  upon  open  account,  showed 
a  steady  increase  of  assets  over  liabilities  year  by  year;  yet  the  real 
value  of  such  assets  was  much  below  their  nominal  value,  owing  to 
the  nature  of  the  credits,  as  before  stated.  Different  witnesses 
familiar  with  this  paper  placed  their  estimate  of  its  real  value  ranging 
all  the  way  from  30  to  50  per  cent  less  than  its  face.  There  is  no 
testimony  in  the  case  showing,  or  tending  in  the  remotest  degree  to 
show,  that  the  business  has  not  been  well  and  economically  managed. 
The  salaries  paid  the  officers  are  moderate  and  reasonable  in  amount, 
and,  in  my  opinion,  well  earned.  The  proof  is  without  contradiction 
that  at  no  time  since  the  complainant's  intestate  became  a  stockholder 
have  the  assets  of  the  corporation  been  in  a  condition  where  a  dividend 
to  the  stockholders  could  be  made  without  serious  detriment  to  the 
business  of  the  corporation,  by  crippling  its  resources,  and  compelling 
it  to  discontinue  business.  Indeed,  this  fact  is  quite  evident  from 
the  amount  of  capital  required  to  carry  on  its  business,  the  nature 
of  its  assets,  and  the  amount  of  its  liabilities. 

The  statute  under  which  the  corporation  was  organized  provided 
that — 

"If  the  directors  of  any  such  corporation  shall  declare  and  pay  a 
dividend  when  the  corporation  is  insolvent,  or  any  dividend  the  pay- 
ment of  which  would  render  it  insolvent,  knowing  such  corporation 
to  be  insolvent,  or  that  the  payment  of  such  dividend  would  render  it 
so,  the  directors  assenting  thereto  shall  be  jointly  and  severally  liable, 
in  an  action  founded  on  this  statute,  for  all  debts  due  from  such  corpor- 
ation at  the  time  of  paying  or  declaring  such  dividend."1 

In  view  of  such  liability,  a  court  of  equity  should  pause  and  ponder 
well  before  compelling  a  board  of  directors  to  declare  and  pay  a 
dividend  in  a  case  where  each  individual  director  testifies  that  the 
corporation  cannot  pay  a  dividend  without  serious  injury  to  the  busi- 
ness of  the  corporation,  and  the  president  and  general  manager  testifies 
that  such  a  step  would  have  injured  their  business  so  that  they  would 
have  had  to  wind  it  up.  The  statute  also  provides  that  the  stock, 
property,  affairs,  and  business  of  every  such  corporation  shall  be 
managed  by  its  directors. 

It  is  a  well-recognized  principle  of  law  that  the  directors  of  a 
corporation,  and  they  alone,  have  the  power  to  declare  a  dividend 
of  the  earnings  of  the  corporation,  and  to  determine  its  amount. 
5  American  and  English  Encyclopedia  of  Law,  725.  Courts  of  equity 

JSee  How.  Stat.  sec.  4149. 


424  LAW  AND  BUSINESS 

will  not  interfere  in  the  management  of  the  directors  unless  it  is  clearly 
made  to  appear  that  they  are  guilty  of  fraud  or  misappropriation  of 
the  corporate  funds,  or  refuse  to  declare  a  dividend  when  the  corpora- 
tion has  a  surplus  of  net  profits  which  it  can,  without  detriment  to  its 
business,  divide  among  its  stockholders,  and  when  a  refusal  to  do  so 
would  amount  to  such  an  abuse  of  discretion  as  would  constitute  a 
fraud,  or  breach  of  that  good  faith  which  they  are  bound  to  exercise 
toward  the  stockholders.  Such  is  not  the  case  here.  The  directors 
themselves  own  the  largest  share  of  the  stock,  and  testify  that  they 
are  anxious  to  receive  a  dividend  whenever  it  can  be  made  without 
injury  to  the  business.  They  have  not  diverted  nor  misapplied  the 
funds  of  the  corporation.  They  have  exercised  the  best  of  faith 
toward  the  stockholders.  The  books  of  the  corporation  show  judicious 
management,  and  that  a  surplus  of  net  earnings  had  accrued  from  year 
to  year  to  and  including  the  year  1887,  which  may  be  considered 
"net  profits,"  which  term  has  been  defined  to  be  what  shall  remain 
as  the  clear  gains  in  any  business  venture  after  deducting  the  capital 
invested  in  the  business,  the  expenses  incurred  in  its  conduct,  and  the 
losses  sustained  in  its  prosecution.  Park  v.  Locomotive  Works,  40 
N.J.  Eq.  114  (3  Atl.  Rep.  162).  By  referring  to  the  balance  sheet  at 
the  close  of  the  business  December  12,  1887,  it  will  be  seen  tliat  the 
capital  invested  in  the  business  was: 

Real  estate $27 , 869 . 42 

Tools  and  machinery 21 , 160. 50 

Merchandise 41 , 783 . 54 


$90,813.46 

Bills  payable $56,917.07 

Accounts  payable  — 24 , 089 . 84 

$81,006.91 

The  items  of  the  account  under  the  head  of  "Real  Estate," 
"Tools,"  etc.,  and  "Merchandise,"  are  not  available  for  the  payment 
of  dividends,  and  may  be  set  aside  as  so  much  capital  invested  in 
the  plant  and  product.  The  resources  out  of  which  profits  may  be 
expected  to  arise  at  that  date  will  have  to  be  scaled  down  to  actual 
value  as  shown  by  the  testimony,  and  perhaps  the  lowest  estimate 
placed  upon  them  by  the  witnesses  should  be  adopted,  if  we  are  to 
sit  in  judgment  upon  the  discretion  exercised  by  the  directors  in  the 


FINANCING  THE  BUSINESS  UNIT  425 

management  of  the  business.  The  lowest  estimate  of  the  value  of  the 
bills  receivable  and  accounts  receivable  is  50  per  cent  of  their  face 
value.  The  face  value,  as  shown  by  the  balance  sheet  of  December 
12,  1887,  is  as  follows: 

Bills  receivable $173,616.16 

Accounts  receivable 87 , 179 . 90 


Total  face  value. .  $260, 796 . 06 


50  per  cent  of  this  is $130,398.03 

Add  cash  in  bank  and  safe  is 2 , 396 . 05 


$132,794.08 

If  from  this  sum  we  deduct  the  bills  and  accounts  payable  as  above 
stated,  there  remains  $51,787.17  as  net  profit.  Now,  since  in  this 
calculation  all  the  liabilities  have  been  provided  for,  and  all  losses 
likely  to  arise  from  the  conversion  of  the  notes  and  accounts  into 
money  have  been  eliminated,  and  as  the  corporation  has  on  hand 
merchandise  of  the  value  of  $41,783.54,  which  consists  of  unsold 
manufactured  articles,  and  raw  material  on  hand  to  be  used  in  manu- 
facturing, it  may  be  asked,  why  may  not  the  whole  or  a  considerable 
part  of  this  net  profit  be  appropriated  to  the  payment  of  dividends 
to  stockholders  ?  The  answer  is  that  it  would  deprive  the  corporation 
of  the  means  from  which  to  carry  on  its  business.  If  this  class  of 
assets  could  be  converted  into  money,  and  the  debts  and  liabilities 
of  the  corporation  paid,  it  would  leave  a  working  capital  in  the  hands 
of  the  directors  of  $51,787.17.  This  sum  is  insufficient  to  carry  for- 
ward the  business.  The  balance  sheets  from  the  books  show  that 
about  $20,000,  on  an  average,  is  paid  out  for  merchandise,  which,  in 
this  instance,  is  the  raw  material,  wood,  and  iron,  etc.,  used  in  manu- 
facture. The  expense  account,  as  contained  in  the  balance  sheet  of 
December  12, 1887,  shows  that  the  operating  and  other  expenses  of  1887 
were  $56,765.26  required  to  carry  on  the  business  a  year.  This  shows 
that  the  $51,787.17  could  not  be  drawn  out  from  the  business  and 
dividend  without  disaster,  and  compelling  a  winding  up  of  the  corpora- 
tion. It  is  true  that  the  directors  would  have  on  hand  merchandise 
of  the  value  of  $41,783.54,  consisting  of  manufactured  articles  and 
material  for  manufacture,  but  this  could  not  be  made  available  as  a 
means  to  carry  on  the  business,  for  the  expense  of  manufacture  must 
be  met  at  once,  and  the  necessities  of  the  business  require  that  sales 


426  LAW  AND  BUSINESS 

of  manufactured  goods  shall  be  made  upon  three  and  four  years' 
time,  and  the  directors  could  derive  no  available  means  from  this 
source  to  meet  the  necessary  and  current  expenses  of  the  business, 
and  the  result  would  be  the  utter  inability  of  the  corporation  to  con- 
tinue business.  Indeed,  this  is  apparent  from  the  fact  that  as  the 
business  is  now  conducted,  with  the  notes  maturing,  the  corporation 
is  obliged  to  borrow  money  and  obtain  credit  in  open  account  to  the 
amount  of  $81,006.91,  as  shown  by  the  statement  of  December  12, 
1887,  for  that  year.  And  this  is  about  an  average  for  several  years 
previous.  It  is  evident  that  no  dividend  can  be  paid  without  borrow- 
ing the  money  for  that  purpose,  and  no  court  of  equity  will  compel 
a  board  of  directors,  against  their  judgment  and  wishes,  to  borrow 
money  to  pay  dividends. 

The  item  in  the  trial  balance  called  "Surplus  Fund"  is  not  an 
asset,  but  what  is  not  fictitious  is  a  liability,  if  anything.  It  is 
composed  first  of  a  fictitious  entry  of  $40,000.00,  supposed  to  represent 
premium  on  the  stock.  The  balance  is  made  up  of  the  difference 
between  the  inventory  of  merchandise  and  the  " Expense  Account," 
which  is  called  "net  gain,"  and  carried  into  the  capital  stock  account 
as  "Surplus  Fund."  If  it  represents  capital  stock,  it  is  a  liability 
equivalent  to  a  stock  dividend  of  that  amount  to  be  divided  pro  rata. 
It  does  not,  however,  represent  a  real  asset,  and  is  not  carried  into  the 
financial  statement  of  "Resources"  and  "Liabilities."  The  merchan- 
dise inventoried  became  converted  into  bills  and  accounts  receivable, 
and  these  in  turn  are  used  in  payment  of  liabilities.  So  that,  in 
estimating  the  standing  of  the  corporation,  this  "Surplus  Fund" 
account  must  be  entirely  omitted.  This  "Suspense  Account"  as 
kept  is  a  fictitious  account.  It  was  opened  for  convenience,  and 
was  designed  to  represent  losses  upon  debts  due  the  corporation, 
estimated  at  10  per  cent  of  all  such  debts.  The  testimony  shows  that 
this  estimate  was  too  small,  and  that  such  losses  equaled  or  exceeded 
30  per  cent. 

For  reasons  stated  above  and  in  the  opinion  of  the  circuit  judge, 
I  am  of  the  opinion  that  the  decree  should  be  affirmed,  with  the  costs 
of  this  court. 

QUESTIONS 

i.  The  D  Company,  having  no  surplus,  declares  and  pays  a  dividend  to 
its  stockholders.  After  having  taken  this  action,  the  corporation  is 
unable  to  pay  its  creditors.  What  are  the  rights  of  the  creditors  under 
the  circumstances  ? 


FINANCING  THE  BUSINESS  UNIT  427 

2.  The  D  Company,  having  declared  a  dividend,  paid  a  portion  thereof 
to  S,  whose  name  appeared  on  the  books  of  the  corporation  as  owner 
of  ten  shares  of  stock.    As  a  matter  of  fact  S  had  sold  his  stock  to  B 
before  the  declaration  of  dividends.    What  are  B's  rights  against  the 
corporation  ? 

3.  The  corporation  has  a  large  surplus  from  which  it  ought  to  declare 
dividends.     S,  a  stockholder  of  the  corporation,  brings  an  action  for  his 
share  of  the  surplus.    What  decision  ? 

4.  The  corporation  has  a  surplus  from  which  it  might  properly  declare 
dividends.    The  directors  refuse  to  do  so  and  assign  as  a  reason  for  its 
refusal  that  the  surplus  is  needed  for  necessary  expansion  in  the  business. 
What  are  the  rights  of  the  stockholders,  if  any,  under  the  circumstances  ? 

5.  The  directors  of  the  corporation  declare  a  dividend,     (a)  At  the  same 
meeting  they  vote  to  rescind  the  declaration  of  dividends.     (6)  At  a 
subsequent  meeting,  but  before  an  announcement  of  the  action,  the 
directors  vote  to  rescind  the  declaration,     (c)  At  a  subsequent  meeting, 
after  an  announcement  of  the  action  had  been  made,  the  directors  vote 
to  rescind  the  declaration.    What  are  the  rights  of  S,  a  stockholder, 
against  the  corporation  under  each  hypothesis  ? 

6.  .The  corporation  declares  a  dividend.    Before  S  is  paid  the  corporation 
becomes  insolvent.    What  are  S's  rights  against  the  corporation  under 
the  circumstances  ? 


FIDELITY  TRUST  COMPANY  v.  LEHIGH  VALLEY 
RAILROAD  COMPANY 

215  Pennsylvania  State  Reports  610  (1906) 

POTTER,  J.  As  to  the  first  question,  whether  or  not  the  dividends 
upon  the  preferred  stock  are  under  the  contract  cumulative,  we  feel 
that  sound  reason,  and  the  weight  of  authority,  both  English  and 
American,  are  in  accordance  with  the  conclusion  reached  by  the 
court  below. 

The  act  of  March  4,  1850,  under  which  the  preferred  stock  was 
issued,  provides  as  follows : 

And  the  said  additional  stock  so  issued  shall  be  entitled  to  a  preference 
over  all  the  other  stock  of  the  said  company,  in  every  future  dividend  of 
profits  which  may  be  declared  by  the  said  company,  until  the  holders  of 
such  additional  stock  shall  have  been  paid  from  the  funds  applicable  to  the 
payment  of  such  dividend,  10  per  cent  per  annum  on  the  amount  of  the 
capital  stock  of  the  company  represented  by  said  shares  of  additional  stock 
so  held  by  them  respectively;  and  the  holders  of  the  other  stock  of  the 
company  shall  not  be  entitled  to  participate  in  any  future  dividend  of  the 


428  LAW  AND  BUSINESS 

profits  of  the  company  till  the  holders  of  said  additional  stock  shall  have 
been  paid  from  the  funds  applicable  to  such  dividend,  10  per  cent  per  annum 
on  the  amount  of  the  capital  stock  of  the  company  represented  by  said  addi- 
tional shares  so  held  by  them  respectively. 

There  is  no  provision  in  the  statute  bearing  directly  upon  the 
question  of  cumulation,  and  in  the  absence  of  any  specification  to  the 
contrary  the  general  rule  would  seem  to  be,  that  the  preferred  stock 
is  entitled  to  arrears.  While  the  act  specifies  that  the  preferred 
stockholders  are  to  be  paid  from  the  profits,  10  per  cent  per  annum, 
before  the  holders  of  other  stock  are  entitled  to  participate  at  all, 
we  can  see  in  the  language  no  limitation  that  the  rights  of  the  preferred 
stockholders  are  conditional  upon  the  earning  of  sufficient  profits 
each  year  to  discharge  their  claim.  No  matter  in  what  form  the 
guarantee  of  dividends  may  be  made,  they  can  be  paid  only  out  of 
the  net  profits.  An  agreement  to  pay  even  though  there  be  no 
profits,  would  be  void  as  against  public  policy.  Since  their  payment 
then  depends  upon  profits,  it  would  be  postponed  during  years  of  busi- 
ness depression  which  showed  no  net  profits.  In  the  present  case  there 
is  no  guarantee  of  profits,  or  of  payment  of  dividends  every  year, 
but  there  is  an  agreement  that  whenever  there  are  profits  to  divide 
the  holders  of  preferred  stock  shall  receive  of  them  at  the  rate  of 
10  per  cent  per  annum  on  the  amount  of  his  holding. 

In  9  American  and  English  Encyclopedia  of  Law  (26.  ed.),  699,  the 
prevailing  principle  applicable  to  such  a  situation  is  thus  summed  up: 
"The  general  rule  is  that  where  the  holder  of  such  preferred  stock  is 
declared  to  be  entitled  to  a  fixed  sum  per  annum,  without  limiting 
the  sum  to  be  paid  as  dividends  to  profits  earned  when  made  within 
a  designated  period,  the  holder  of  the  preferred  stock  has  a  prior  claim 
over  the  common  stockholders  on  subsequent  dividends  to  make  up 
the  deficiency." 

In  i  Morawetz  on  Priv.  Corp.  (2d  ed.,  1886),  section  458,  it  is  said 
that  "If  a  corporation  has  agreed  or  guaranteed  that  the  holders  of 
preferred  shares  shall  be  paid  dividends  at  a  certain  rate  per  annum, 
and  the  profits  at  any  time  are  insufficient  to  enable  the  company  to 
perform  its  agreements,  the  arrears  must  be  made  up  out  of  the 
profits  subsequently  earned;  and  no  dividends  can  be  paid  to  the 
holders  of  the  common  shares  until  the  preferred  shareholders  have 
been  fully  paid."  And  in  2  Clark  and  Marshall  on  Private  Corpora- 
tions (190),  section  529^,  the  rule  is  thus  stated:  "If  the  contract 
with  the  preferred  stockholders  guaranteed  or  entitled  them  in 


FINANCING  THE  BUSINESS  UNIT  429 

general  terms  to  a  certain  annual  dividend,  not  making  the  dividend 
payable  in  each  year  dependent  upon  the  profits  of  that  year,  the 
dividends  are  cumulative;  and  if  the  profits  in  any  year  are  not' 
sufficient  to  pay  the  dividend,  it  must  be  paid,  in  addition  to-subse- 
quent dividends,  out  of  the  profits  of  subsequent  years,  before  any 
dividends  can  be  paid  to  the  holders  of  common  stock." 

And  again  in  i  Cook  on  Stockholders,  section  273,  we  find  the 
decisions  summarized,  and  the  further  suggestion  that  the  rule  as 
stated  is  in  accord  with  the  usages  of  the  business  community.  The 
author  says, 

If  preferred  stock  is  issued,  without  any  mention  of  whether  or  not  the 
dividends  are  cumulative,  then  the  law  makes  it  cumulative.  As  soon  as 
there  are  net  profits  available  for  dividends,  the  corporation  must  pay  the 
preferred  dividends,  and  all  arrears  thereon  before  a  dividend  is  declared 
on  the  common  stock.  This  is  a  well- settled  rule  at  common  law  in  this 
country  and  in  England,  and  is  not  only  equitable,  but  is  in  accord  with  the 
understanding  of  the  business  community.  The  right  of  the  preferred 
stockholders  to  arrears  of  dividend  is  not  deemed  waived  by  delay,  nor  in 
any  way,  except  upon  clear  proof  of  intent  to  waive. 

We  regard  the  decision  of  this  court  in  West  Chester,  etc..  Railroad 
Co.  v.  Jackson,  77  Pa.  321,  as  covering  substantially  the  same  question 
as  that  now  before  us;  and  under  the  ruling  in  that  case,  the  defendant 
company  here  is  liable  for  the  arrears  in  the  payments  of  dividends 
at  the  rate  of  10  per  cent  per  annum.  It  seems  to  us  that  reasonable 
construction  of  the  contract  requires  us  to  hold  that  it  means  simply 
that  whenever  there  are  profits  to  divide  the  company  is  to  see  to 
it  that  the  holder  of  preferred  stock  has  received  the  stipulated 
amount  of  10  per  cent  per  annum  before  making  any  award  to  the 
other  stockholders.  The  case  of  Henry  v.  Great  Northern  Railway  Co., 
i  DeG.  &  J.  606  (638),  is  recognized  as  the  leading  authority  on  the 
subject  under  consideration,  and  LORD  CRANWORTH  there  makes  a 
suggestion  which  has  much  force,  as  a  reason  for  the  view  he  adopts. 
He  says, 

If  the  directors  are,  as  probably  they  will  be,  ordinary  shareholders, 
they  will  have  an  interest  so  from  time  to  time  to  set  aside  portions  of  their 
funds  for  the  benefit  of  the  company  in  the  next  half-year  as  to  prevent  the 
preferred  shareholders  from  receiving  a  dividend  in  full,  and  they  will 
thus  create  a  larger  fund  for  the  division  on  the  next  occasion,  the  entire 
benefit  of  which,  on  the  argument  of  the  defendant,  will  accrue  to  the 
benefit  of  the  ordinary  shareholders When  I  see  that  on  one  con- 


430  LAW  AND  BUSINESS 

struction  of  those  acts  the  legislature  will  have  given  to  the  directors  an 
interest  in  opposition  to  their  duty,  and  that  on  the  other  construction  they 
will  not  have  done  so,  I  am  led  strongly  to  believe  that  the  latter  is  the 
sounder  interpretation. 

In  the  present  case,  it  is  manifest  that  a  greater  advantage  to  the 
other  stockholders  would  accrue,  if  the  preferred  stock  be  considered 
as  noncumulative.  No  such  object  was  of  course  before  the  directors 
in  refraining  from  the  payment  of  annual  dividends,  but  the  possible 
result  shows  how  such  a  power  might  be  exercised  to  deprive  the 
preferred  stockholders  of  their  contract  rights,  and  a  construction 
that  would  permit  of  such  a  result  is  to  be  avoided.  We  are  of  the 
opinion  that  the  dividends  upon  preferred  shares  were  properly  held 
to  be  cumulative. 

Turning  now  to  the  second  question:  Are  the  preferred  stock- 
holders to  be  charged,  as  against  the  amount  in  arrears  for  the  years 
from  1893  to  1904  with  the  amount  paid  in  excess  of  10  per  cent 
during  the  years  1860,  1863,  and  1866.  The  preference  created  by 
the  statute  gave  to  the  holders  of  the  preferred  stock,  the  right  to 
receive  five  dollars  per  share  per  annum  on  each  share  of  stock  held 
by  them,  before  the  other  stockholders  were  entitled  to  anything. 
That  was  the  extent  of  the  preference.  If  the  funds  applicable  to  a 
dividend  amounted  to  just  enough  for  that  purpose  the  other  stock- 
holders took  nothing.  But  when  each  class  of  stock  had  been  paid 
10  per  cent,  they  were  equal,  and  equally  entitled  to  partake  of  what- 
ever remained  in  the  fund  applicable  for  dividend  purposes.  The 
preferred  stockholders  were  not  creditors,  nor  was  the  amount  paid 
to  them  in  excess  of  10  per  cent  in  any  one  year  to  be  charged  to  them 
as  an  advance  payment  upon  any  future  dividends  that  might  be 
earned  or  divided  in  coming  years.  There  was  no  preference  shown 
in  the  distribution  of  these  extra  dividends.  All  the  shareholders 
fared  alike  in  so  far  as  they  were  concerned.  The  preference  created 
under  the  act  of  the  assembly  went  only  so  far  as  to  give  to  the 
preferred  stockholders  a  right  to  claim  the  first  proceeds  out  of  the 
fund  applicable  to  dividends,  to  the  extent  of  five  dollars  per  share 
per  annum  on  their  stock  and  no  farther.  After  that  amount  was 
paid  the  common  stockholders  were  entitled  to  participate,  and  did 
so  participate,  taking  during  the  years  when  extra  dividends  were 
paid,  the  same  amount  per  share  as  the  preferred  stockholders. 
So  that  the  extra  payments  during  the  years  mentioned  cannot  be 
considered  as  overpayments  to  the  holders  of  preferred  stock.  If  the 


FINANCING  THE  BUSINESS  UNIT  431 

preferred  stockholders  had  been  limited,  under  the  terms  of  the  con- 
tract, to  10  per  cent  per  annum  in  any  one  year,  and  all  the  balance 
of  the  fund  had  belonged  exclusively  to  the  common  stockholders, 
then  the  contention  that  these  extra  dividends  should  be  set  off  against 
the  arrears  would  be  sound.  But  there  is  no  such  limitation  in  the 
act.  The  preferred  stockholders  stood  upon  the  same  plane  as  the 
others,  with  the  additional  advantage  that  they  had  the  first  right  to 
partake  in  the  distribution  of  profits  up  to  the  limit  of  five  dollars 
per  share  per  annum,  and  if  necessary,  the  whole  amount  of  the  profit 
might  be  taken  for  that  purpose,  even  if  thereby  the  other  stockholders 
were  excluded.  We  agree  with  the  conclusion  of  the  learned  court 
below,  that  the  holders  of  preferred  stock  are  entitled  to  have  the 
arrears  paid  to  them  by  the  defendant  company,  without  any  deduc- 
tion on  account  of  dividends  paid  at  a  time  when  there  had  been  no 
deficit.  In  so  far  as  the  excess  of  such  payments  over  the  10  per  cent 
per  annum  to  the  preferred  stockholders  was  concerned,  it  was  declared 
not  as  a  matter  of  preference,  but  an  equal  distribution  to  all  stock- 
holders. 

The  assignments  of  error  are  overruled,  the  appeal  is  dismissed, 
and  the  decree  of  the  court  below  is  affirmed. 

QUESTIONS 

1 .  What  is  the  purpose  of  giving  to  certain  stock  preference  as  to  dividends  ? 

2.  Does  a  preference  as  to  dividends  give  the  holders  of  preferred  stock  a 
right  to  the  guaranteed  amount  when  the  corporation  has  no  surplus  ? 

3.  S  is  holder  of  preferred  stock  of  the  D  Company.     The  company  has  a 
surplus  from  which  it  might  properly  declare  dividends  but  it  does  not 
do  so.     What  are  S's  rights  against  the  corporation  ? 

4.  The  company  paid  dividends  on  neither  common  nor  preferred  stock 
for  three  years.    It  now  has  a  large  surplus  and  is  contemplating  a 
dividend  by  which  preferred  stockholders  will  receive  their  annual  8' 
per  cent  and  common   stockholders  will   receive  a  like  amount.     S 
contends  that  the  preferred  stock  is  entitled  to  dividends  for  the  three 
years  in  which  no  dividends  were  paid  before  the  common  stock  is 
entitled  to  anything.    What  decision  ? 

5.  The  company  has  paid  the  preferred  stockholders  the  amount  guaranteed 
on  their  stock  for  a  given  year,  has  paid  a  like  amount  to  holders  of 
common  stock,  and  still  has  a  surplus  which  it  contemplates  dividing 
equally  between  common  and  preferred   stock.     The  common  stock- 
holders contend  that  they  are  entitled  to  all  the  surplus  after  preferred 
stockholders  have  been  paid  their  guaranteed  amount.     What  decision  ? 


CHAPTER  V 

MANAGEMENT  OF  THE  BUSINESS  UNIT 

i.     Keeping  the  Unit  within  Its  Powers 

a)  Powers  of  the  Unit 
CHARLES  RIVER  BRIDGE  v.  WARREN  BRIDGE 

ii  Peters'  United  States  Reports  420  (1837) 

In  1785  the  legislature  of  Massachusetts  incorporated  certain 
individuals  as  the  Charles  River  Bridge,  authorized  the  corporation 
to  erect  a  bridge  over  the  Charles  River  and  granted  it  the  privilege 
of  exacting  toll  for  its  use.  Under  a  later' enactment  the  legislature 
chartered  the  Warren  Bridge  and  authorized  it  to  construct  a  free 
bridge  across  the  Charles  River  within  a  few  rods  of  the  Charles 
River  Bridge.  The  Charles  River  Bridge  brought  this  suit  in  equity 
and  challenged  the  validity  of  the  act  providing  for  the  Warren  Bridge. 
The  complainant  contends  that  the  act  violates  that  provision  of  the 
constitution  which  declares  that  no  "  State  shall  pass  any  law  impairing 
the  obligation  of  contract."  The  members  of  the  Supreme  Court  of 
Massachusetts  were  equally  divided  in  opinion  on  the  question  at  issue 
and  accordingly  dismissed  complainant's  bill. 

TANEY,  C.  J.  Much  has  been  said  in  the  argument  of  the  prin- 
ciples of  construction  by  which  this  law  is  to  be  expounded,  and  what 
undertakings,  on  the  part  of  the  state,  may  be  implied.  The  court 
thinks  there  can  be  no  serious  difficulty  on  that  head.  It  is  the  grant 
of  certain  franchises  by  the  public  to  a  private  corporation,  and  in  a 
matter  where  the  public  interest  is  concerned.  The  rule  of  construc- 
tion in  such  cases  is  well  settled,  both  in  England,  and  by  the  decisions 
of  our  own  tribunals.  In  2  Barn.  &  Adol.  793,  in  the  case  of  Pro- 
prietors of  the  Stourbridge  Canal  v.  Wheely  and  Others,  the  court  says: 
"The  canal  having  been  made  under  an  act  of  parliament,  the  rights 
of  the  plaintiffs  are  derived  entirely  from  that  act.  This,  like  many 
other  cases,  is  a  bargain  between  a  company  of  adventurers  and  the 
public,  the  terms  of  which  are  expressed  in  the  statute;  and  the  rule 
of  construction  in  all  such  cases,  is  now  fully  established  to  be  this: 
that  any  ambiguity  in  the  terms  of  the  contract,  must  operate  against 

432 


MANAGEMENT  OF  THE  BUSINESS  UNIT  433 

the  adventurers,  and  in  favor  of  the  public,  and  the  plaintiffs  can  claim 
nothing  that  is  not  clearly  given  them  by  the  act."  And  the  doctrine 
thus  laid  down  is  abundantly  sustained  by  the  authorities  referred 
to  in  this  decision.  The  case  itself  was  as  strong  a  one  as  coutd 
well  be  imagined,  for  giving  to  the  canal  company,  by  implication, 
a  right  to  the  tolls  they  demanded.  Their  canal  had  been  used  by 
the  defendants,  to  a  very  considerable  extent,  in  transporting  large 
quantities  of  coal.  The  rights  of  all  persons  to  navigate  the  canal 
were  expressly  secured  by  the  act  of  parliament;  so  that  the  company 
could  not  prevent  them  from  using  it,  and  the  toll  demanded  was 
admitted  to  be  reasonable.  Yet,  as  they  only  used  one  of  the  levels 
of  the  canal,  and  did  not  pass  through  the  locks,  and  the  statute,  in 
giving  the  right  to  exact  toll,  had  given  it  for  articles  which  passed 
" through  any  one  or  more  of  the  locks,"  and  had  said  nothing  as  to 
toll  for  navigating  one  of  the  levels,  the  court  held  that  the  right  to 
demand  toll,  in  the  latter  case,  could  not  be  implied,  and  the  company 
were  not  entitled  to  recover  it.  This  was  a  fair  case  for  an  equitable 
construction  of  the  act  of  incorporation,  and  for  an  implied  grant, 
if  such  a  rule  of  construction  could  ever  be  permitted  in  a  law  of 
that  description.  For  the  canal  had  been  made  at  the  expense  of 
the  company;  the  defendants  had  availed  themselves  of  the  fruits  of 
their  labors,  and  used  the  canal  freely  and  extensively  for  their  own 
profit.  Still,  the  right  to  exact  toll  could  not  be  implied,  because 
such  a  privilege  was  not  found  in  the  charter. 

Borrowing,  as  we  have  done,  our  system  of  jurisprudence  from  the 
English  law,  and  having  adopted,  in  every  other  case,  civil  and 
criminal,  its  rules  for  the  construction  of  statutes,  is  there  anything 
in  our  local  situation,  or  in  the  nature  of  our  political  institutions, 
which  should  lead  us  to  depart  from  the  principle  where  corporations 
are  concerned?  Are  we  to  apply  to  acts  of  incorporation  a  rule  of 
construction  differing  from  that  of  the  English  law,  and,  by  implica- 
tion, make  the  term  of  a  charter  in  one  of  the  states,  more  unfavorable 
to  the  public,  than  upon  an  act  of  parliament,  framed  in  the  same 
words,  would  be  sanctioned  in  an  English  court?  Can  any  good 
reason  be  assigned  for  excepting  this  particular  class  of  cases  from  the 
operation  of  the  general  principle,  and  for  introducing  a  new  and 
adverse  rule  of  construction  in  favor  of  corporations,  while  we  adopt 
and  adhere  to  the  rules  of  construction  known  to  the  English  common 
law,  in  every  case,  without  exception?  We  think  not;  and  it  would 
present  a  singular  spectacle,  if,  while  the  courts  in  England  are 


434  LAW  AND  BUSINESS 

restraining,  within  the  strictest  limits,  the  spirit  of  monopoly,  and 
exclusive  privileges  in  nature  monopolies,  and  confining  corporations 
to  the  privileges  plainly  given  to  them  in  their  charter,  the  courts  of 
this  country  should  be  found  enlarging  these  privileges  by  implication, 
and  construing  a  statute  more  unfavorably  to  the  public,  and  to  the 
rights  of  the  community,  than  would  be  done  in  a  like  case  in  an 
English  court  of  justice. 

Adopting  the  rule  of  construction  above  stated  as  the  settled  one, 
we  proceed  to  apply  it  to  the  charter  of  1785  to  the  proprietors  of 
the  Charles  River  Bridge.  This  act  of  incorporation  is  in  the  usual 
form,  and  the  privileges  such  as  are  commonly  given  to  corporations 
of  that  kind.  It  confers  on  them  the  ordinary  faculties  of  a  corpora- 
tion, for  the  purpose  of  building  the  bridge,  and  establishes  certain 
rates  of  toll,  which  the  company  are  authorized  to  take.  This  is  the 
whole  grant.  There  is  no  exclusive  privilege  given  to  them  over  the 
waters  of  Charles  River,  above  or  below  the  bridge.  No  right  to 
erect  another  bridge  themselves,  nor  to  prevent  other  persons  from 
erecting  one.  No  engagement  from  the  state,  that  another  shall  not 
be  erected,  and  no  undertakings  not  to  sanction  competition,  nor  to 
make  improvements  that  may  diminish  the  amount  of  its  income. 
Upon  all  these  subjects  the  charter  is  silent,  and  nothing  is  said  in  it 
about  a  line  of  travel,  so  much  insisted  on  in  the  argument,  in  which 
they  are  to  have  exclusive  privileges.  No  words  are  used,  from 
which  an  intention  to  grant  any  of  these  rights  can  be  inferred.  If 
the  plaintiff  is  entitled  to  them,  it  must  be  implied,  simply,  from  the 
nature  of  the  grant,  and  cannot  be  inferred  from  the  words  by  which 
the  grant  is  made. 

The  relative  position  of  the  Warren  Bridge  has  already  been 
described.  It  does  not  interrupt  the  passage  over  the  Charles  River 
Bridge,  nor  make  the  way  to  it  or  from  it  less  convenient.  One  of 
the  faculties  or  franchises  granted  to  that  corporation  has  been 
revoked  by  the  legislature,  and  its  right  to  take  the  tolls  granted  by 
the  charter  remains  unaltered.  In  short,  all  the  franchises  and  rights 
of  property  enumerated  in  the  charter,  and  there  mentioned  to  have 
been  granted  to  it,  remain  unimpaired.  But  its  income  is  destroyed 
by  the  Warren  Bridge,  which,  being  free,  draws  on  the  passengers 
and  property  which  would  have  gone  over  it,  and  renders  their 
franchise  of  no  value.  This  is  the  gist  of  the  complaint.  For  it  is 
not  pretended  that  the  erection  of  the  Warren  Bridge  would  have  done 
them  any  injury,  or  in  any  degree  affected  their  right  of  property, 


MANAGEMENT  OF  THE  BUSINESS  UNIT  435 

if  it  had  not  diminished  the  amount  of  their  tolls.  In  order  then  to 
entitle  themselves  to  relief,  it  is  necessary  to  show  that  the  legislature 
contracted  not  to  do  the  act  of  which  they  complain,  and  that  they 
impaired,  or,  in  other  words,  violated  that  contract  by  the  erection 
of  the  Warren  Bridge. 

The  inquiry  then  is,  does  the  charter  contain  such  a  contract  on 
the  part  of  the  state  ?  Is  there  any  such  stipulation  to  be  found  in 
that  instrument?  It  must  be  admitted  on  all  hands  that  there  is 
none — no  words  that  even  relate  to  another  bridge,  or  to  the  diminu- 
tion of  their  tolls,  or  to  the  line  of  travel.  If  a  contract  on  that  subject 
can  be  gathered  from  the  charter,  it  must  be  by  implication  and  cannot 
be  found  in  the  words  used.  Can  such  an  agreement  be  implied? 
The  rule  of  construction  before  stated  is  an  answer  to  the  question. 
In  charters  of  this  description,  no  rights  are  taken  from  the  public, 
or  given  to  the  corporation,  beyond  those  which  the  words  of  the 
charter,  by  their  natural  and  proper  construction,  purport  to  convey. 
There  are  no  words  which  import  such  a  contract  as  the  plaintiffs 
in  error  contend  for,  and  none  can  be  implied,  and  the  same  answer 
must  be  given  to  them  that  was  given  by  this  court  to  the  Providence 
Bank.  The  whole  community  are  interested  in  this  inquiry,  and  they 
have  a  right  to  require  that  the  power  of  promoting  their  comfort 
and  convenience,  and  of  advancing  the  public  prosperity,  by  providing 
safe,  convenient,  and  cheap  ways  for  the  transportation  of  produce 
and  the  purposes  of  travel,  shall  not  be  construed  to  have  been 
surrendered  or  diminished  by  the  state,  unless  it  shall  appear  by  plain 
words  that  it  was  intended  to  be  done. 

The  judgment  of  the  supreme  court  of  Massachusetts,  dismissing 
plaintiff's  bill,  must,  therefore,  be  affirmed  with  costs. 

QUESTIONS 

1 .  What  are  the  sources  of  the  powers  of  a  corporation  ? 

2.  Compare  a  corporation  with  a  partnership  in  respect  to  the  powers 
which  it  may  exercise. 

3.  It  is  said  that  the  following  powers  are  peculiar  to  corporate  existence 
and  are  implied  even  when  not  granted:    (a)  the  power  of  perpetual 
succession;    (b}  the  power  to  sue  and  be  sued  in  a  corporate  name;    (c) 
the  power  to  receive,  hold,  and  transfer  property  for  corporate  purposes; 
(d)  the  power  to  have  a  corporate  seal;    (e)the  power  to  make  by-laws 
for  corporate  government ;  and  (/)  the  power  to  expel  members.     Why 
should  these  powers  be  implied  ? 


436  LAW  AND  BUSINESS 

4.  What  is  meant  by  franchise?    What  is  the  difference  between  the 
powers  and  franchises  of  a  corporation  ? 

5.  When  is  the  principle  announced  by  CHIEF  JUSTICE  TANEY  in  this  case 
applicable  in  the  construction  of  corporate  charters  ? 

6.  When  a  corporation  is  exceeding  its  corporate  powers,  what  parties  are 
in  a  position  to  object  ? 

NICOLL  v.  THE  NEW  YORK  AND  ERIE  RAILROAD 
COMPANY 

12  New  York  Reports  121  (1854) 

PARKER,  J.  The  grant  from  Dederer  to  the  Hudson  and  Delaware 
Railroad  Co.,  bearing  date  the  first  day  of  July,  1835,  was  made  to 
that  company,  and  their  successors.  Under  that  grant,  there  can 
be  no  doubt  that  Hudson  and  Delaware  Railroad  Co.  took  a  fee. 
The  word  of  perpetuity  used  would  have  been  sufficient  to  describe 
a  fee,  even  under  the  most  strict  requirements  of  the  common  law. 

The  company  had  ample  power  to  purchase  lands.  It  was  a 
power  incident  at  common  law  to  all  corporations,  unless  they  were 
specially  restrained  by  their  charters  or  by  statute.  (2  Kent,  281; 
Co.  Litt,  440,  3006.  i  Kyd  on  Corporations,  76,  78,  108,  115;  3 
Pick.  239.)  And  in  this  case  the  power  was  expressly  conferred  by 
the  ninth  section  of  the  charter  (Sess.  Laws  of  1835,  p.  113);  and  by 
the  sixteenth  section  there  were  given  to  it  the  general  powers  con- 
ferred upon  corporations  (i  R.S.  731),  one  of  which  is  that  of  holding, 
purchasing,  and  conveying  such  real  estate  as  the  purposes  of  the 
corporation  may  require.  But  if  no  words  of  perpetuity  had  been 
used,  the  grantor  owning  a  fee,  the  company  would  have  taken  a 
fee,  for  the  statute  is  now  imperative,  that  every  grant  shall  pass  all 
the  estate  or  interest  in  the  grantor,  unless  the  intent  to  pass  a  less 
estate  or  interest  shall  appear  by  express  terms  or  be  necessarily 
implied  in  the  terms  of  grant,  (i  R.S.  748,  sec.  i.) 

But  it  is  objected  that,  because  by  the  act  of  incorporation,  there 
was  given  to  it  only  a  term  of  existence  of  fifty  years  (Laws  of  1835, 
p.  no,  sec.  i),  therefore  the  grant  shall  be  deemed  to  have  conveyed  an 
estate  for  years,  and  not  in  fee.  The  unsoundness  of  that  position 
is  easily  shown.  It  was  never  yet  held,  that  a  grant  of  a  fee  in 
express  terms  could  be  restricted  by  the  fact  that  the  grantee  had 
but  a  limited  term  of  existence.  If  it  were  so,  a  grant  could  never 
be  made  to  an  individual  in  fee,  because,  in  his  earthly  existence,  he 
is  not  immortal.  Under  such  a  rule,  a  man  could  never  buy  a  greater 


MANAGEMENT  OF  THE  BUSINESS  UNIT  437 

interest  in  a  farm  than  a  life  estate.  It  would  follow  that  all  estates 
would  be  life  estates,  except  those  held  by  perpetual  corporations. 
The  intent  of  parties,  fully  expressed  in  a  deed,  would  avail  nothing, 
but  all  grants  would  be  measured  by  the  mortality  of  the  grantee. 
It  is  needless  to  follow  out  the  proposition  further  to  show  its  ab- 
surdity. 

It  is  not  to  the  parties  to  a  grant,  but  its  terms,  that  we  look  to 
ascertain  the  character  and  extent  of  the  estate  conveyed,  (i  R.S. 
748,  sec.  i.)  The  change  made  by  the  statute  favors  the  grantee, 
where  there  are  no  express  terms  in  the  grant,  presuming  the  grantor 
intended  to  convey  all  his  estate. 

It  is  erroneous  to  say  that  an  estate  in  fee  cannot  be  fully  enjoyed 
by  a  natural  person,  or  by  a  corporation  of  limited  duration.  It  is 
an  enjoyment  of  the  fee  to  possess  it,  and  to  have  the  full  control  of 
it,  including  the  power  of  alienation  by  which  its  full,  value  may  at 
once  be  realized. 

It  is  well  settled  that  corporations,  though  limited  in  their  dura- 
tion, may  purchase  and  hold  a  fee,  and  they  may  sell  such  real  estate 
whenever  they  shall  find  it  no  longer  necessary  or  convenient. 
(5Denio,  389;  2  Preston  on  Estates,  50.)  Kent  says:  "Corporations 
have  a  fee  simple  for  the  purpose  of  alienation,  but  they  have  only  a 
determinable  fee,  for  the  purpose  of  enjoyment.  On  the  dissolution 
of  the  corporation,  the  reverter  is  to  the  original  grantor  or  his  heirs, 
but  the  grantor  will  be  excluded  by  the  alienation  in  fee,  and  in 
that  way  the  corporation  may  defeat  the  possibility  of  a  reverter." 
(2  Kent,  282;  5  Denio,  389;  i  Comst.  R.  509.)  Large  sums  of  money 
are  accordingly  expended  by  railroad  companies  in  erecting  extensive 
station  houses  and  depots,  and  by  banking  corporations  in  erecting 
banking  houses,  because,  holding  the  land  in  fee,  they  may  be  able  to 
reimburse  themselves  for  the  outlay  by  selling  the  fee  before  the 
termination  of  their  corporate  existence. 

QUESTIONS 

1.  The  D  Company  is  incorporated  with  power  to  construct  and  operate 
a  sawmill.     No  express  power  is  given  to  the  corporation  to  purchase 
and  hold  property.    Does  it  have  power  to  acquire  and  hold  real  and 
personal  property  ?     If  so,  to  what  extent  ? 

2.  The  corporation  is  given  express  power  to  acquire  and  hold  such  real  and 
personal  property  as  may  be  necessary  for  the  conduct  of  its  business. 
Can  this  corporation  take  real  and  personal  property  under  a  will  ? 


438  LAW  AND  BUSINESS 

3.  The  corporation  is  negotiating  for  a  farm  near  its  plant,  expecting  to 
sell  in  the  future  at  a  profit.     The  minority  stockholders  ask  that  the 
corporation  be  enjoined  from  making  the  purchase.     What  decision  ? 

4.  The  corporation  contracted  for  five  acres  of  land  near  its  plant,  not 
because  it  was  then  needed,  but  because  it  might  be  needed  in  the  near 
future  for  the  business  which   is  rapidly   expanding.     The  minority 
stockholders  ask  that  the  corporation  be  enjoined  from  making  the 
purchase.    What  decision  ? 

5.  The  B  Company  was  incorporated  with  power  to  engage  in  the  banking 
business.    It  made  a  loan  of  $5,000  to  D  and  received  from  him  a  mort- 
gage on  his  farm.    The  bank  brought  proceedings  to  foreclose  the 
mortgage  when  the  debt  matured.    D  contended  that  the  mortgage 
was  void  because  the  corporation  had  no  power  to  hold  real  estate 
except  for  banking  purposes.     What  decision  ? 


COLEMAN  v.  HAGEY 
252  Missouri  Reports  102  (1913) 

WALKER,  J.  Free  from  the  impress  of  a  trust  or  lien,  as  is  the 
property  of  a  solvent  business  corporation,  its  right  to  dispose  of  its 
property  in  such  manner  as  it  chooses,  subject,  of  course,  to  regulatory 
statutes,  would  seem  to  follow  as  a  natural  consequence  of  unrestricted 
ownership,  the  one  being  the  correlative  of  the  other.  In  many  of 
the  cases  we  have  heretofore  discussed  defining  the  trust  fund  theory, 
the  right  to  dispose  of  assets  has  been  declared  as  one  of  the  attributes 
of  solvent  corporate  existence.  Authorities  expressly  in  support  of 
the  right  are,  however,  numerous  and  conclusive. 

A  certain  class  of  corporations  are  excepted  from  the  rule 
authorizing  them  to  sell  their  assets,  the  exception  and  the  rule  being 
clearly  stated  in  an  early  Massachusetts  case  as  follows : 

Corporations  established  for  objects  quasi-public,  such  as  railway,  canal, 
and  turnpike  corporations,  to  which  the  right  of  eminent  domain  and  other 
large  privileges  are  granted  in  order  to  enable  them  to  accommodate  the 
public,  ....  and  also  charitable  and  religious  bodies  ....  may  perhaps 
be  restrained  from  alienating  their  property,  and  compelled  to  appropriate 

it  to  specific  uses But  it  is  not  so  with  corporations  of  a  private 

character,  established  solely  for  trading  and  manufacturing  purposes. 
Neither  the  public  nor  the  legislature  has  any  direct  interest  in  their  business 
or  its  management.  These  are  committed  solely  to  the  stockholders, 
who  have  a  pecuniary  stake  in  the  proper  conduct  of  their  affairs.  By 


MANAGEMENT  OF  THE  BUSINESS  UNIT  439 

accepting  a  charter,  they  do  not  undertake  to  carry  on  the  business  for  which 
they  are  incorporated,  indefinitely,  and  without  any  regard  to  the  condition 
of  their  corporate  property.  [Treadwell  v.  Salisbury  Manufacturing  Co., 
7  Gray  (Mass.),  393,  404-] 

The  St.  Louis  Court  of  Appeals,  speaking  through  GOODE,  J., 
in  Jorndt  v.  Hub  6*  Spoke  Co.,  112  Mo.  App.  i.  c.  344,  said:  "When 
there  are  no  stockholders  except  the  directors  and  officers,  the  latter 
may,  if  they  wish,  give  away  an  asset  by  unanimous  consent,  and  the 
gift  will  be  good,  unless  the  rights  of  creditors  are  impaired.  All  the 
stockholders  of  a  corporation  may  consent  to  an  appropriation  of  an 
asset  by  an  official  if  the  appropriation  would  not  be  detrimental 
to  creditors."  The  rule  announced  in  the  singular  number  in  this 
case  would  be  equally  true  if  stated  in  the  plural  in  reference  to 
assets. 

JUSTICE  SHELDON  of  the  supreme  court  of  Illinois  in  Reichwald  v. 
Hotel  Co.,  106  111.  439,  said:  "But  it  is  claimed  that  the  board  of 
directors  did  not  have  the  power  to  dispose  of  all  its  property,  and 
thus  destroy  the  corporation.  The  effect  of  this  transfer  of  all  the 
hotel  property  no  doubt  was  to  terminate  the  business  of  the  corpora- 
tion; but  that  was  not  the  necessary  effect.  It  is  entirely  clear, 
upon  the  authorities,  that  the  disposal  of  all  of  the  property  of  a 
corporation  has  not  the  effect  to  end  or  dissolve  the  corporation." 
It  is  not  inappropriate  to  state  in  connection  with  this  ruling  that  the 
corporation  in  the  case  at  bar  was  organized  under  the  laws  of  the 
state  of  Illinois. 

JUDGE  HAIGHT  in  a  New  York  Court  of  Appeals  case  of  Holmes 
&  Griggs  Manufacturing  Co.  v.  Holmes  &  Wessell  Metal  Co.,  127  N.Y. 
252,  said:  "The  plaintiff  had  the  right,  with  the  consent  of  its  stock- 
holders, to  sell  its  plant  and  retire  from  business;  and  it  appears 
from  the  evidence  in  this  case  that  the  consent  of  all  the  stockholders 

was  given  to  the  sale  that  was  made Inasmuch  as  this  was  done 

with  the  consent  of  all  the  stockholders,  it  being,  the  act  of  a  private 
corporation,  not  in  any  manner  harming  the  public,  we  see  no  reason 
for  condemning  its  title  to  the  stock  so  obtained."  And  the  rule  is 
clearly  stated  in  7  American  and  English  Encyclopedia  of  Law, 
734,  as  follows:  "And  by  the  weight  of  authority,  both  in  England 
and  in  the  United  States,  a  strictly  private  commercial  corporation, 
owing  no  particular  duties  to  the  public,  may,  with  the  consent  of 
all  the  shareholders,  in  the  absence  of  express  or  implied  restrictions 


440  LAW  AND  BUSINESS 

in  its  charter,  or  prejudice  to  the  rights  of  creditors,  transfer  all  its 
property  to  another  corporation  or  person,  if  the  latter  is  capable  of 
taking.  And  it  may  do  so,  even  though  the  effect  may  be  to  render 
it  incapable  of  further  carrying  on  its  business." 

In  the  late  case  of  Mooreshead  v.  United  Railway  Co.,  203  Mo.  121, 
this  court  speaking  through  GRAVES,  J.,  said  that  where  there  is  no 
bar  in  the  statute  or  corporate  articles,  a  solvent  corporation  may  dis- 
pose of  its  assets  as  it  may  deem  to  its  advantage,  the  same  as  a  natural 
person.  We  find  no  variance  from  or  exceptions  to  this  rule  or  right 
of  corporations  under  the  conditions  stated,  either  in  texts,  treatises, 
or  adjudicated  cases.  Without  further  burdening  this  opinion  with 
quotations  it  may  be  said  generally  that  the  following  cases  affirm- 
atively announce  the  unrestricted  right  of  solvent  corporations  which 
have  no  liabilities  to  dispose  of  their  capital  stock  in  such  manner  as 
they  deem  proper.  (Brown  v.  Schleier,  194  U.S.  18;  People  ex  rel. 
Electric  Co.  v.  Barker,  141  N.Y.  251;  Carr  v.  Rochester  Turn  Co.,  207 
Pa.  St.  392;  Stockton  v.  Am.  Tob.  Co.,  55  N.J.  Eq.  352;  Miller  v. 
Am.  Tob.  Co.,  56  N.J.  847;  Rochester  Railroad  Co.  v.  Rochester,  205 
U.S.  236,  256;  Willamette  Manufacturing  Co.  v.  Bank,  119  U.S.  191, 
198;  Great  Western  M.  &•.  M.  Co.  v.  Harris,  128  Fed.  321.) 

Not  only  do  solvent  corporations  without  liabilities  have  the 
unrestricted  right  with  the  approval  of  their  shareholders,  to  dispose 
of  their  assets,  but  they  may  also  sell  and  transfer  their  charters  or 
corporate  franchises  and  vest  same  in  others.  The  sale  and  transfer 
in  such  cases  is,  in  legal  effect,  but  a  surrender  or  abandonment  of  the 
old  charter  by  the  corporation  and  a  grant  de  now  of  the  charter  to 
the  transferees  or  purchasers.  (State  ex  rel.  v.  Sherman  et  al.,  22  Ohio 
St.  411;  i  Wilgus  on  Corporations,  p.  1082.)  The  right  of  disposition 
of  either  assets  of  franchises  of  a  corporation,  is,  as  to  their  effect, 
to  be  measured  by  the  following  rules :  First,  the  character  of  the  sale 
and  transfer  is  to  be  determined  by  the  circumstances  existing  at 
the  time  it  took  place  (McCole  v.  Loehr,  79  Ind.  430);  second,  if  a 
grantor  remains  solvent  after  the  sale  and  transfer  of  its  assets,  and 
has  sufficient  property  left  to  pay  all  of  its  then  existing  debts,  its 
conveyance  cannot  be  regarded  as  a  fraud  upon  creditors  (Kain  v. 
Larkin,  131  N.Y.  300,  307);  third,  one  assailing  a  transfer  assumes 
the  burden  of  showing  that  it  was  made  in  bad  faith  and  that  it  left 
the  grantor  without  ample  property  to  pay  its  then  existing  debts. 
(Nevers  v.  Hack,  138  Ind.  260;  H olden  v.  Burnham,  63  N.Y.  74; 
Penace  v.  Croan,  51  Ind.  336.) 


MANAGEMENT  OF  THE  BUSINESS  UNIT  441 

QUESTIONS 

1.  The  D  Company,  incorporated  for  the  purpose  of  carrying  on  a  manu- 
facturing business,  was  authorized  by  its  charter  to  acquire  and  hold 
real  and  personal  property  for  corporate  purposes,     (a)  It  executed  a" 
mortgage  on  its  machinery  to  secure  a  debt  it  owed,     (b)  It  sold  a  tract 
of  land  which  it  owned  to  get  money  with  which  to  pay  other  debts. 
S,  a  stockholder,  asks  that  these  transactions  be  declared  void  because 
the  corporation  had  no  power  to  enter  into  them.     What  decision  ? 

2.  The  D   Company,  incorporated  for  the  purpose  of  constructing  and 
operating  a  railroad,  was  authorized  to  acquire  and  hold  property  for 
corporate  purposes.     It  entered  into  a  contract  to  sell  a  piece  of  land 
which  it  acquired  under  the  power  of  eminent  domain.     Discuss  the 
validity  of  the  contract. 

3.  The  D  Company,  engaged  in  the  insurance  business,  proposes  to  pay 
a  loss  to  X,  although  the  loss  was  not  covered  by  X's  insurance  policy. 
The  minority  stockholders  ask  that  the  corporation  be  enjoined  from 
making  the  payment.     What  decision  ? 

4.  The  D  Company,  engaged  in  the  hotel  business,  proposes  to  give  $5,000 
as  an  inducement  to  secure  the  national  nominating  convention  of  the 
Democratic  party  in  the  city  where  it  operates  its  hotel.     Discuss  the 
validity  of  the  proposed  action. 

5.  The  D  Company,  engaged  in  manufacturing  and  selling  breakfast  food, 
proposes  to  give  away  $5,000  worth  of  its  products  for  advertising 
purposes.     S,  a  stockholder  in  the  corporation,  asks  that  the  corporation 
be  enjoined  from  making  the  gift.     What  decision  ? 

BROWN  v.  WINNISIMMET  COMPANY 
ii  Allen's  Massachusetts  Reports  326  (1865) 

The  suit  is  founded  on  an  agreement  which  the  defendant  company 
agreed  to  charter  to  plaintiffs  their  iron  ferry  boat  "  Winnisimmet, " 
with  the  understanding  that  she  was  to  be  rechartered  to  United  States. 
Plaintiffs  to  pay  $125  per  day  rent,  and  account  to  the  company  for 
one-half  of  all  sums  realized  on  a  rechartering  in  excess  of  $125  per 
day  under  a  charter  executed.  The  company  has  collected  from  the 
United  States  at  the  rate  of  $200  per  day.  The  declaration  was  on 
an  account  annexed.  One  item  being  a  charge  of  $1,650  for  one-half, 
cash  due  and  paid  by  the  United  States  to  the  defendant  company 
as  charter  money.  Plaintiffs  had  verdict  and  defendants  allege 
exceptions.  Among  other  questions  presented  on  appeal  was  whether 
or  not  the  company  had  authority  under  its  charter  to  make  the  lease 
in  question. 


442  LAW  AND  BUSINESS 

BIGELOW,  C.  J.  The  main  defense  to  this  action  appears  to  have 
been  that  the  contracts  or  agreements  on  which  the  plaintiffs  rely  in 
support  of  their  claim  against  the  defendants  were  such  that  the  latter 
had  no  power  or  authority  to  make  them  under  the  act  of  the  legisla- 
ture by  which  they  were  incorporated,  and  that  they  cannot  for  that 
reason  be  enforced  in  a  court  of  law.  The  later  English  authorities 
seem  to  sanction  the  doctrine  that  such  a  ground  of  defense,  although  it 
may  be  "  unbecoming  and  ungracious, "  or,  in  the  stronger  language  of 
LORD  ST.  LEONARDS,  " indecent"  is  nevertheless  legal  and  valid,  if 
it  be  made  to  appear,  either  by  the  express  provisions  of  an  act  of 
incorporation  or  by  necessary  and  reasonable  application  therefrom, 
that  a  contract  which  is  sought  to  be  enforced  in  an  action  at  law 
against  a  corporation  is  beyond  the  scope  of  the  powers  granted  by 
its  charter ;  or,  in  other  words,  that  the  legislature  did  not  intend  that 
the  body  created  by  them  should  enter  into  contracts  of  a  character 
like  that  which  the  plaintiff  makes  a  foundation  of  a  claim  against  it. 
South  Yorkshire  Railway,  etc.  v.  Great  Northern  Railway,  9  Exch.  55,  85. 
Hood  v.  New  York  and  New  Haven  Railroad,  22  Conn.  502;  Pearce  v. 
Madison  6°  I.R.  Co.,  21  How.  441,  16  L.Ed.  184;  Angell  and  Ames  on 
Corporations,  256,  and  cases  cited.  It  is  on  the  principle  which  seems 
to  be  adopted  by  these  authorities  that  the  defendants  rely  to  defeat 
the  present  action. 

We  have  no  occasion  now  to  examine  at  length  into  the  correctness 
of  this  doctrine,  or  to  ascertain  with  precision  its  proper  limitations 
or  operation,  because  we  are  of  opinion  that  the  defendants  do  not 
bring  the  case  at  bar  within  any  recognized  application  of  the  rule. 
Looking  only  at  the  words  of  the  act  by  which  the  defendants  were 
incorporated,  St.  1833,  c.  197,  we  are  unable  to  say  that  the  contracts 
on  which  the  plaintiffs  rely  are  so  far  foreign  to  the  object  for  which 
a  charter  was  granted  to  the  defendants  as  to  require  us  to  declare 
them  to  have  been  ultra  vires  and  illegal,  and  that  no  action  upon 
them  can  be  maintained  in  a  court  of  law.  In  the  absence  of  all 
evidence  of  extraneous  facts,  and  taking  the  case  as  it  was  presented 
at  the  trial,  on  a  comparison  of  the  contracts  set  by  the  plaintiffs  with 
the  act  incorporating  the  defendants,  it  appears  to  us  that  the 
scrupulous  care  and  anxiety  to  keep  within  the  limit  of  their  corporate 
powers,  which  the  defendants  now  manifest,  will  not  avail  them  in 
defense  of  this  action,  although  it  may  induce  them  to  exercise  a 
greater  caution  in  entering  into  contracts  which  they  cannot  fulfil 
without  violating  their  charter.  They  were  incorporated  with 


MANAGEMENT  OF  THE  BUSINESS  UNIT  443 

power  to  establish,  continue,  and  maintain  a  ferry  between  the  city 
of  Boston  and  the  town  of  Chelsea,  and  were  authorized  to  own. 
hold,  and  possess  vessels,  steamboats,  and  such  other  property,  not 
exceeding  in  value  one  hundred  thousand  dollars,  as  might  be  necessary 
and  convenient  for  the  better  management  of  such  ferry  and  of  the 
affairs  of  said  corporation.  There  can  be  no  doubt  that  under  this 
charter  the  main  purpose  for  which  the  defendants  were  incorporated 
was  to  carry  on  the  transportation  of  persons,  vehicles,  merchandise, 
and  other  articles  by  means  of  a  ferry  across  Charles  River  between 
the  points  designated  in  the  act.  All  else  was  to  be  subordinate 
and  incidental  to  this  main  design.  So  far,  the  argument  urged  in 
behalf  of  the  defendants  is  sound  and  irrefragable. 

But  the  next  step  is  not  so  easily  taken,  nor  does  it  lead  to  the 
point  at  which  the  defendants  seek  to  arrive.  It  was  not  shown  at 
the  trial  that  the  steamboat  which  was  the  subject  of  the  contracts  with 
the  plaintiffs  was  not  a  necessary  and  proper  vessel  to  be  used  by  the 
defendants  in  the  prosecution  of  the  business  of  their  ferry,  nor  that 
by  reason  of  its  ownership  they  had  exceeded  the  limit  of  personal 
property  which  they  were  empowered  by  their  charter  to  hold.  Nor 
could  it  be  properly  inferred  that  it  was  not  reasonably  required  for 
the  legitimate  business  of  the  corporation,  because  it  was  not  in 
actual  use  by  them  on  the  ferry  at  the  time  the  contract  for  letting 
it  was  entered  into  with  the  plaintiffs,  and  because  it  was  chartered 
under  the  contract  for  the  use  of  the  government  of  the  United  States. 
Such  an  inference  could  be  made  only  on  the  theory  that  the  defend- 
ants were  so  restricted  by  their  charter  that  they  could  not  hold  any 
greater  number  of  vessels  or  steamboats  than  Were  absolutely  required 
for  present  or  immediate  and  constant  use  on  their  ferry,  or,  if  they 
could  be  allowed  to  possess  a  larger  number,  that  they  could  not  use 
or  employ  them  in  any  other  business  or  for  any  other  purpose  what- 
ever, but  must  suffer  them  to  remain  at  their  wharf  to  decay  or 
deteriorate  for  the  want  of  use,  or,  at  least,  in  a  condition  in  which  they 
could  be  of  no  advantage  to  themselves  or  others. 

But  we  think  such  a  narrow  and  restricted  construction  of  the 
powers  granted  to  the  defendants  is  inconsistent  with  any  reasonable 
view  of  the  intention  of  the  legislature  in  conferring  on  them  a 
corporate  franchise,  and  is  not  required  by  any  considerations  of 
justice  or  sound  policy.  On  the  contrary,  we  cannot  doubt  that 
under  their  charter  they  are  authorized  to  hold  any  amount  or 
kind  of  personal  property,  within  the  limit  of  value  fixed  by  the 


444  LAW  AND  BUSINESS 

act,  which  they  may  deem  necessary  or  expedient  for  the  proper 
conduct  and  management  of  the  business  of  the  ferry;  that  it  is 
no  excess  of  their  corporate  powers  to  own  steamboats  which  are 
not  required  for  immediate  or  constant  use  in  the  daily ,  prosecu- 
tion of  their  ordinary  business  but  which  may  be  convenient  or 
useful  in  case  of  sudden  emergency  or  accident,  or  when  those  which 
are  employed  in  the  regular  service  of  the  ferry  might  be  with- 
drawn for  repairs;  that  it  is  not  necessary  that  such  extra  or  addi- 
tional steamboats  should  be  kept  unemployed  when  not  required 
for  the  business  of  the  ferry,  but  that  it  is  competent  for  the  defend- 
ants to  use  them  or  to  let  them  to  others  to  be  used  in  carrying 
on  any  legitimate  business  for  which  they  are  suitable,  such  as  the 
towage  of  vessels  and  the  transportation  of  passengers  or  merchandise, 
so  long  as  such  use  is  only  temporary  and  incidental  to  the  main 
purpose  for  which  they  are  owned  by  the  defendants. 

We  know  of  no  rule  or  principle  by  which  an  act  creating  a 
corporation  for  certain  specific  objects  or  to  carry  on  a  particular 
trade  or  business  is  to  be  strictly  construed,  as  prohibitory  of  all  other 
dealings  or  transactions,  not  coming  within  the  exact  scope  of  those 
designated.  Undoubtedly  the  main  business  of  a  corporation  is  to 
be  confined  to  that  class  of  operations  which  properly  appertain  to 
the  general  purposes  for  which  its  charter  was  granted.  But  it  may 
also  enter  into  contracts  and  engage  in  transactions  which  are  inci- 
dental or  auxiliary  to  its  main  business,  or  which  may  become  neces- 
sary, expedient,  or  profitable  in  the  care  and  management  of  the 
property  which  it  is  authorized  to  hold  under  the  act  by  which  it  was 
created.  For  examplej  it  might  perhaps  be  held  that  a  corporation 
established  for  the  purpose  of  manufacturing  cotton  and  woollen 
cloth  could  not  properly  invest  all  its  capital  in  mill  powers  and 
privileges,  and  engage  exclusively  in  the  business  of  leasing  them 
to  others  to  be  used  for  manufacturing  purposes,  or  that  it  could  not 
lawfully  confine  its  operations  to  the  making  of  steam-engines  and 
machines  for  sale.  But  no  one  could  doubt  that  it  would  be  within 
the  scope  of  its  powers  to  allow  another  person  or  corporation,  for  a 
reasonable  compensation,  to  draw  surplus  water  from  its  mill  pond, 
or  to  employ  that  portion  of  its  steam  power  which  was  not  required 
for  its  own  use.  So  a  stage  coach  company  or  a  street  railway 
corporation  would  exceed  its  corporate  powers  if  it  engaged  exten- 
sively in  the  transportation  of  passengers  and  merchandise  on  land  or 
sea  by  steam;  but  it  would  be  acting  strictly  within  the  limits  of  its 


MANAGEMENT  OF  THE  BUSINESS  UNIT  445 

capacity  if  it  should  occasionally  let  a  horse  or  a  coach  or  car,  not 
required  for  its  own  immediate  purposes,  to  another  person  or  corpora- 
tion, or  should  enter  into  a  contract  for  the  employment  of  its  horses 
in  another  occupation  during  a  portion  of  the  year  when  the  business 
of  the  corporation  did  not  require  their  use.  We  can  see  no  substantial 
difference  between  transactions  of  this  character  and  that  which  the 
defendants  entered  into  when  they  made  the  contracts  with  the 
plaintiffs. 

These  views  of  the  extent  of  the  authority  granted  to  the  defend- 
ants by  the  legislature  are  a  decisive  answer  to  the  defense  relied  on 
by  them  at  the  trial.  The  steamboat,  under  the  contract  with  the 
plaintiffs,  was  let  to  the  United  States  in  a  season  of  great  public 
exigency,  for  military  purposes;  the  defendants  did  not  part  with 
her  control  for  any  definite  period  of  time,  but  only  from  day  to  day, 
nor  did  they  send  her  to  a  great  distance,  where  she  could  not  be 
speedily  recalled.  The  defendants  retained  the  right  and  power 
to  resume  the  possession  and  use  of  her  at  any  moment.  In  this  state 
of  facts,  we  are  of  opinion  that  the  court  below  took  a  correct  view 
of  law,  and  was  right  in  refusing  to  rule,  as  requested  by  the  defend- 
ants, that  the  contracts  entered  into  with  the  plaintiffs  were  not 
authorized  by  the  defendants'  charter,  and  were  therefore  void. 

Exceptions  overruled. 
QUESTIONS 

1 .  Where  did  the  corporation  in  this  case  get  the  power  to  lease  a  part  of 
its  property  to  the  plaintiffs  ?    Would  the  decision  have  been  the  same 
in  case  the  corporation  had  leased  all  of  its  property  to  the  plaintiffs  ? 

2.  The  D  Company  was  incorporated  with  power  to  manufacture  and  sell 
gas.    It  later  began  manufacturing  and  selling  gas  fixtures  in  order  to 
increase  the  sale  of  gas.     S,  one  of  its  stockholders,  asks  that  the  corpora- 
tion be  enjoined  from  engaging  in  this  new  business.     What  decision  ? 

3.  The  B  Company  was  incorporated  with  power  to  conduct  a  banking 
business.    It  proposes  to  erect  a  ten-story  building,  to  use  two  floors  of  the 
building  for  banking  purposes,  and  to  lease  the  remaining  space.    Discuss 
the  validity  of  the  proposed  action. 

4.  What  is  the  test  for  determining  whether  a  given  undertaking,  not 
expressly  authorized,  is  ultra  vires  on  the  part  of  a  corporation  ? 

NORTHSIDE  STREET  RAILWAY  COMPANY 

v.  WORTHINGTON 
88  Texas  Reports  562  (1895) 

The  Fort  Worth  City  Co.  and  the  Northside  Street  Railway  Co. 
were  both  organized  under  the  general  incorporating  laws  of  the 


446  LAW  AND  BUSINESS 

state  of  Texas;  the  purpose  of  the  first  being,  "the  purchase,  sub- 
division, and  sale  of  lands  in  cities,  towns,  and  villages:"  and  that  of 
the  second,  "the  construction  and  maintenance  of  street  railways." 
Neither  corporation  had  any  express  power  to  extend  its  credit  in 
aiding  the  other.  The  two  corporations  jointly  issued  bonds,  secured 
by  a  mortgage  on  their  joint  property  to  promote  a  scheme  of  suburban 
development.  This  was  a  suit  by  bondholders  against  the  Northside 
Street  Railway  Co.,  the  Fort  Worth  City  Co.,  and  other  defendants,  on 
these  bonds.  At  the  trial  the  plaintiffs  prevailed,  securing  judgment 
on  the  bonds  with  foreclosure  of  the  mortgage. 

GAINES,  C.  J.  It  is  contended  on  behalf  of  the  plaintiffs  in  error, 
that  the  execution  of  the  bonds  was  ultra  vires,  and  that  therefore 
they  are  void.  In  determining  this  question,  we  may  recur  to  a  few 
leading  principles.  Corporations  are  the  creatures  of  the  law,  and 
they  can  only  exercise  such  powers  as  are  granted  by  the  law  of  their 
creation.  An  express  grant,  however,  is  not  necessary.  In  every 
express  grant,  there  is  implied  a  power  to  do  whatever  is  necessary 
or  reasonably  appropriate  to  the  exercise  of  the  authority  expressly 
conferred.  The  difficulty  arises,  in  any  particular  case,  whenever 
we  attempt  to  determine  whether  the  power  of  a  corporation  to  do  an 
act  can  be  implied  or  not.  The  question  has  given  rise  to  much 
litigious  controversy,  and  to  much  conflict  of  decision.  It  is  not  easy 
to  lay  down  a  rule  by  which  the  question  may  be  determined;  but 
the  following,  as  announced  by  a  well-known  text  writer,  commends 
itself  not  only  as  being  reasonable  in  itself,  but  also  as  being  in  accord 
with  the  great  weight  of  authority: 

Whatever  be  a  company's  legitimate  business,  the  company  may  foster 
it  by  all  the  usual  means;  but  it  may  not  go  beyond  this.  It  may  not, 
under  the  pretext  of  fostering,  entangle  itself  in  proceedings  with  which 
it  has  no  legitimate  concern.  In  the  next  place,  the  courts  have  however 
determined  that  such  means  shall  be  direct,  not  indirect;  i.e.,  that  a  com- 
pany shall  not  enter  into  engagements,  as  the  rendering  of  assistance  to 
other  undertakings  from  which  it  anticipates  a  benefit  to  itself,  not  imme- 
diately, but  immediately  by  reaction,  as  it  were,  from  the  success  of  the 
operations  thus  encouraged — all  proceedings  inevitably  tending  to  breaches 
of  duty  on  part  of  the  directors,  to  abandonment  of  its  peculiar  objects 
on  part  of  the  corporation.  [Green's  Brice's  Ultra  Vires,  88.] 

In  short,  if  the  means  be  such  as  are  usually  resorted  to  and  a 
direct  method  of  accomplishing  the  purpose  of  the  incorporation, 
they  are  within  its  powers;  if  they  be  unusual  and  tend  in  an  indirect 


MANAGEMENT  OF  THE  BUSINESS  UNIT  447 

manner  only  to  promote  its  interests,  they  are  held  to  be  ultra  vires. 
For  example,  a  railroad  company  may  establish  and  maintain  refresh- 
ment houses  along  its  line  for  the  accommodation  of  its  passengers. 
Flanagan  v.  Railroad,  L.R.  7  Eq.,  116.  Such  establishments  are 
not  unusual,  are  strictly  subordinate  to  the  main  purpose  for  which 
such  companies  are  created,  and  tend  immediately  to  increase  their 
traffic.  So  it  has  been  held,  that  a  railroad  corporation  has  the  power 
to  contract  with  the  owner  of  a  steam  vessel  to  maintain  a  through 
traffic  and  carry  beyond  its  line,  and  that  it  can  recover  of  the  owner 
of  such  vessel  damages  to  goods  resulting  from  its  unseaworthiness, 
for  which  the  company  has  had  to  pay.  South  Wales  Railway 
Company  v.  Redmond,  10  C.B.,  N.S.,  675.  It  is  now  generally 
recognized,  that  a  railway  company  may  contract  to  carry  beyond 
its  line,  and  it  would  seem  to  follow,  that  a  reasonable  traffic  arrange- 
ment with  another  carrier  for  through  transportation  is  legitimate. 
On  the  other  hand,  in  Coleman  v.  The  Eastern  Counties  Railway  Co. 
10  Ber.,  i,  the  performance  of  a  contract  by  which  the  company 
sought  to  establish  a  line  of  steamships  between  a  terminus  of  one  of 
its  branches  and  a  foreign  port,  and  by  which  it  attempted  to  guarantee 
a  dividend  on  the  venture,  was  enjoined.  Upon  a  hasty  consideration, 
the  two  cases  may  appear  not  clearly  distinguishable;  but  we  think 
them  entirely  consistent,  and  that  they  well  illustrate  the  rule  which 
we  have  stated.  In  the  former,  the  contract  was  subsidiary  to  the 
legitimate  business  of  the  company,  and  was  such  as  was  reasonable 
and  appropriate  to  a  railroad,  one  of  the  termini  of  which  was  upon 
seashore.  It  tended  directly  to  increase  the  traffic  of  the  company. 
In  the  latter,  the  establishment  of  the  line  of  steamships  was  not 
subordinate  to  the  business  of  the  railroad  company,  but  was  in 
its  nature  a  distinct  enterprise.  It  tended  to  increase  the  busi- 
ness of  the  port  to  which  the  company's  branch  line  extended,  and 
the  increase  of  the  business  of  the  port  tended  to  increase  the 
traffic  of  the  railroad;  but  this  was  a  mediate,  and  not  a  direct 
result. 

In  Davis  v.  Railway,  131  Massachusetts,  258,  it  is  held,  that  it  is 
beyond  the  powers  of  a  railway  company,  or  of  a  corporation  organized 
under  the  general  statutes  of  Massachusetts  for  the  manufacture 
and  sale  of  musical  instruments,  to  guarantee  the  payment  of  the 
expenses  of  a  musical  festival.  The  opinion  in  that  case  is  by  CHIEF 
JUSIICE  GRAY,  and  is  a  very  able  and  exhaustive  discussion  of  the 
question. 


448  LAW  AND  BUSINESS 

In  Pearce  v.  Railway,  21  Howard,  441,  it  was  held,  that  two  rail- 
road companies  which  had  consolidated  were  not  authorized  to 
establish  a  steamship  line  to  run  in  connection  with  their  railroads. 

In  Plymouth  Railway  v.  Colwell,  39  Pennsylvania  State,  it  was 
decided,  that  a  railway  company  was  not  authorized  by  its  charter 
to  maintain  a  canal. 

In  Timkinson  v.  Railway,  Law  Reports,  35  Chancery  Division, 
675,  it  was  held,  that  a  proposed  subscription  by  the  company  to  an 
institution  known  as  the  " Imperial  Institute"  was  not  prevented 
from  being  ultra  vires  by  the  fact  that  the  establishment  of  the 
institute  might  benefit  the  company  by  causing  an  increase  of 
passenger  traffic  over  their  line. 

These  principles,  applied  to  the  facts  of  this  case,  lead  to  the 
conclusion,  that  neither  the  Fort  Worth  City  Co.  nor  the  Northside 
Street  Railway  Co.  had  the  power  to  extend  its  credit  to  foster  the 
interests  of  the  other  company.  Viewed  in  the  light  of  the  peculiar 
facts  of  the  case,  it  is  apparent  that  the  building  up  and  settlement 
of  the  suburb  tended  to  increase  the  business  of  the  street  railway 
which  connected  that  suburb  with  the  city  of  which  it  was  the  out- 
growth. On  the  other  hand,  it  is  equally  clear  that  the  establishment 
of  the  street  railway  tended  to  promote  the  enterprise  of  the  other 
corporation.  It  is  also  clear,  that  the  establishment  and  maintenance 
of  a  street  railway  is  not  an  object  which  was  expressed  in  the  articles 
of  incorporation  of  the  city  company,  and  that  the  building  up  of 
an  addition  to  a  city  is  not  a  purpose  expressed  in  the  charter  of  the 
other  corporation.  That  the  success  of  the  one  enterprise  tended  to 
promote  the  success  of  the  other  was  not  itself  sufficient  to  authorize 
the  one  corporation  to  aid  the  other,  for  the  reason  that  the  benefit 
which  was  to  accrue  was  not  the  direct  result  of  the  means  employed. 

The  transaction  in  controversy,  when  properly  analyzed  and 
stripped  of  its  form,  is  one  in  which  the  two  corporations  agreed  to 
borrow  a  sum  of  money  to  be  divided  between  them,  and  that  each 
should  become  the  surety  for  the  other  for  the  amount  received  by 
such  other.  It  is  too  well  settled  to  require  the  citation  of  authority, 
that  a  corporation  of  the  character  of  those  in  question,  in  the  absence 
of  statutory  authority,  cannot  bind  itself  by  accommodation  paper 
executed  for  the  benefit  of  another  party.  It  follows,  that  if  either 
corporation  in  this  case  is  to  be  held  bound  for  more  than  its  propor- 
tionate amount  of  the  debt  incurred,  it  must  be  upon  the  ground  that 
it  had  power  to  aid  in  the  prosecution  of  the  business  of  the  other. 


MANAGEMENT  OF  THE  BUSINESS  UNIT  44$ 

Did  the  street  railway  company  have  such  power  ?  If  it  is  to 
be  held,  that  because  of  the  indirect  benefits  which  would  result  to 
it  from  the  success  of  the  enterprise,  it  was  authorized  by  the  law  to 
aid  in  building  up  the  suburb  of  the  city  company,  then  it  should  also 
be  held,  that  it  had  the  power  to  employ  its  funds  and  its  credit  in 
fostering  to  any  other  undertaking  which  was  calculated  to  increase 
the  population  of  the  city  of  Fort  Worth  or  of  any  portion  of  the 
territory  which  lies  along  its  line.  The  effect  of  that  ruling  would  be 
to  empower  every  business  corporation  not  only  to  carry  on  the  very 
business  it  was  created  to  prosecute,  but  also  to  engage  in  every 
enterprise  which  would  tend  to  increase  the  volume  of  its  principal 
business  and  the  revenues  to  be  derived  therefrom.  This  would  leave 
the  scope  of  its  operations  without  any  reasonable  limit.  That  such 
is  not  the  law,  the  authorities  already  cited  are  sufficient  to  show. 
Street  railways  are  projected  for  the  carriage  for  hire  of  people  living 
within  the  near  cities  and  towns.  Street  railway  companies  are 
chartered  for  the  specific  purpose  of  establishing  and  operating  street 
railways,  and  not  to  increase  the  population  of  the  towns  and  cities 
through  which  they  are  established — though  their  operation  may  have 
that  effect,  and  though  an  increase  of  population  may  result  indirectly 
to  their  benefit. 

Cities  and  towns  have  grown  up  without  the  aid  of  street  railways. 
The  origin  of  the  latter  is  comparatively  very  recent.  The  law  does 
not  recognize  them  as  a  usual  means  of  carrying  out  the  purpose  of 
a  corporation  organized  to  purchase  and  subdivide  lands  and  to  sell 
them  in  lots.  They  are  provided  for  in  the  general  law  as  a  distinct 
purpose  for  which  corporations  may  be  created.  The  two  enterprises 
may  be  of  mutual  assistance;  and  if  the  same  persons  desire  to  form 
two  distinct  corporations  for  the  prosecution  at  the  same  time  of  two 
undertakings,  with  a  view  to  the  mutual  benefit  which  may  result 
from  the  concurrent  operation  of  the  two,  no  reason  is  seen  why  they 
should  not  do  so.  But  each  should  confine  itself  to  its  proper  business, 
and  should  not  divert  its  capital  or  extend  its  credit  to  the  assistance 
of  the  other. 

QUESTIONS 

1.  What  test  does  this  case  announce  for  determining  whether  a  given 
undertaking  of  a  corporation  is  authorized  by  its  charter  ? 

2.  The  D  Company  was  incorporated  with  power  to  operate  a  railroad  from 
X  to  Y,  a  distance  of  about  3,000  miles.    It  later  bought  and  began  to 
operate  boats  from  X  to  Z,  about  50  miles  across  the  lake  from  X. 


450  LAW  AND  BUSINESS 

S,  a  stockholder  in  the  corporation,  asks  that  the  corporation  be  enjoined 
from  continuing  the  operation  of  the  boats.     What  decision  ? 

3.  There  was  no  good  hotel  in  Y.     The  corporation  accordingly  let  a 
contract  for  a  hotel  building  to  be  erected  near  its  terminal  station  in 
Y.     It  later  changed  its  plans  and  refused  to  perform  the  contract.     In  an 
action  against  the  corporation  on  this  contract,  the  corporation  pleads 
ultra  vires.    What  decision  ? 

4.  The  D  Company  was  incorporated  for  the  purpose  of  manufacturing 
and  selling  boots  and  shoes.    It  later  began  to  manufacture  and  sell 
hats.     S  asks  that  the  corporation  be  enjoined  from  engaging  in  the  hat 
business.     What  decision  ? 

5.  The  D  Company  was  incorporated  with  power  to  manufacture  and  sell 
building  materials.     The  corporation  entered  into  a  contract  with  X, 
a  contractor,  by  which  it  guaranteed  the  faithful  performance  of  a 
building  contract  by  X  in  consideration  of  X's  promise  to  buy  all  his 
materials  from  the  corporation.    Discuss  the  validity  of  this  contract. 


MONUMENT  NATIONAL  BANK  v.  GLOBE  WORKS 

10 1  Massachusetts  Reports  57  (1869) 

HOAR,  J.  The  single  question  presented  for  our  decision  in  this 
cause,  all  others  which  arise  upon  the  report  having  been  waived,  is, 
whether  the  note  of  a  manufacturing  corporation,  in  the  hands  of  a 
holder  in  good  faith  for  value,  who  took  it  before  maturity,  and  without 
knowledge  that  the  makers  had  not  received  the  full  consideration, 
cannot  be  enforced  against  them,  because  it  was  in  fact  made  as  an 
accommodation  note. 

The  argument  for  the  defendants  takes  the  ground  that  to  issue 
an  accommodation  note  is  not  within  the  powers  conferred  upon  the 
corporation;  and  that,  as  any  persons  taking  it  had  notice  that  it  was 
the  note  of  the  corporation,  they  had  notice  that  it  was  of  no  validity 
unless  issued  for  a  purpose  within  the  scope  of  the  corporate  powers, 
and  were  therefore  bound  to  ascertain  not  only  that  it  was  executed 
by  the  officer  of  the  corporation  who  had  the  general  authority  to 
sign  the  notes  which  they  might  lawfully  make,  but  that  the  purpose 
for  which  it  was  issued  was  such  as  the  charter  authorized  them  to 
entertain  and  execute. 

The  court  are  all  of  opinion  that  this  position  is  not  tenable,  and 
that  the  defense  cannot  be  maintained. 

It  has  long  been  settled  in  this  Commonwealth  that  a  manufactur- 
ing corporation  has  the  power  to  make  a  negotiable  promissory  note. 


MANAGEMENT  OF  THE  BUSINESS  UNIT  451 

N arragansett  Bank  v.  Atlantic  Silk  Co.,  3  Met.  282.  And  it  was  held 
in  Bird  v.  Daggett,  97  Mass.  494,  as  a  just  corollary  to  that  proposition, 
that  such  a  note  in  the  hands  of  a  holder  in  good  faith  for  value  is 
binding  upon  the  maker,  although  made  as  an  accommodation  note. 
The  question  was  not  discussed,  nor  the  reasons  for  the  decision  fully 
stated,  in  Bird  v.  Daggett;  but  it  was  assumed  that  the  doctrine 
announced  was  clear  and  undoubted  law. 

The  doctrine  of  ultra  vires  has  been  carried  much  farther  in 
England  than  the  courts  in  this  country  have  been  disposed  to  extend 
it;  but,  with  just  limitations  the  principle  cannot  be  questioned, 
that  the  limitations  to  the  authority,  powers,  and  liability  of  a  corpora- 
tion are  to  be  found  in  the  act  creating  it.  And  it  no  doubt  follows, 
as  claimed  by  the  learned  counsel  for  the  defendants,  that  when 
powers  are  conferred  and  denned  by  statute,  everyone  dealing  with 
the  corporation  is  presumed  to  know  the  extent  of  those  powers. 

But  when  the  transaction  is  not  the  exercise  of  a  power  not 
conferred  on  a  corporation,  but  the  abuse  of  a  general  power  in  a 
particular  instance,  the  abuse  not  being  known  to  the  other  contracting 
party,  the  doctrine  of  ultra  vires  does  not  apply.  As  was  said  by 
SELDEN,  J.  in  Bissell  v.  Michigan  Southern  and  Northern  Indiana 
Railroad  Co.,  22  N.Y.  289,  290: 

There  are  no  doubt  cases  in  which  a  corporation  would  be  estopped 
from  setting  up  this  defense,  although  its  contract  might  have  been  really 
unauthorized.  It  would  not  be  available  in  a  suit  brought  by  a  bona  fide 
indorsee  of  a  negotiable  promissory  note,  provided  the  corporation  was 
authorized  to  give  notes  for  any  purpose;  and  the  reason  is,  that  the 
corporation,  by  giving  the  note  has  virtually  represented  that  it  was  given 
for  some  legitimate  purpose,  and  the  indorsee  could  not  be  presumed  to 
know  the  contrary.  The  note,  however,  if  given  by  a  corporation  absolutely 
prohibited  by  its  charter  from  giving  notes  at  all,  would  be  avoidable  not 
only  in  the  hands  of  the  original  payee,  but  in  those  of  any  subsequent 
holder;  because  all  persons  dealing  with  a  corporation  are  bound  to  take 
notice  of  the  extent  of  its  chartered  powers.  The  same  principle  is  applicable 
to  contracts  not  negotiable.  When  the  want  of  power  is  apparent  upon 
comparing  the  act  done  with  the  terms  of  the  charter,  the  party  dealing  with 
the  corporation  is  presumed  to  have  knowledge  of  the  defect,  and  the 
defense  of  ultra  vires  is  available  against  him.  But  such  a  defense  would 
not  be  permitted  to  prevail  against  a  party  who  cannot  be  presumed  to  have 
had  any  knowledge  of  the  want  of  authority  to  make  the  contract.  Hence, 
if  the  question  of  power  depends  not  merely  upon  the  law  under  which  the 
corporation  acts,  but  upon  the  existence  of  certain  extrinsic  facts,  resting 


452  LAW  AND  BUSINESS 

peculiarly  within  the  knowledge  of  the  corporate  officers,  then  the  corpora- 
tion would  be  estopped  from  denying  that  which,  by  assuming  to  make 
the  contract,  it  had  virtually  affirmed. 

This  doctrine  seems  to  us  sound  and  reasonable;  and  in  con- 
formity with  it,  it  was  held  in  Farmers'  &°  Mechanics'  Bank  v.  Empire 
Stone  Dressing  Co.,  5  Bosw.  175,  that  an  accommodation  acceptance 
by  an  officer  of  a  manufacturing  corporation,  on  behalf  of  the  company 
was  not  binding,  unless  the  consideration  had  been  advanced  upon  the 
faith  of  the  acceptance;  but  that  if  the  consideration  was  paid  in 
good  faith  after  the  acceptance,  and  upon  the  credit  of  it,  it  could  be 
enforced. 

So  it  was  said  by  LORD  ST.  LEONARDS,  that  he  felt  a  disposition 
"to  restrain  the  doctrine  of  ultra  vires  to  clear  cases  of  excess  of 
power,  with  the  knowledge  of  the  other  party,  express  or  implied 
from  the  nature  of  the  corporation,  and  of  the  contract' entered  into." 
Eastern  Counties  Railway  Co.  v.  Hawkes,  5  H.L.  Cas.  331,  373. 

The  cases  on  which  the  defendants  rely  are  cases  against  municipal 
corporations,  in  respect  to  which  the  rule  is  much  more  rigid,  or  for 
the  most  part  those  in  which  the  other  contracting  party  had  notice 
upon  the  face  of  the  transaction  of  the  want  of  corporate  power. 

There  can  be  no  doubt  that  it  is  very  often  true  that  a  corporation 
may  be  responsible  for  the  unauthorized,  and  even  for  the  unlawful 
acts  of  its  agents,  apparently  clothed  with  its  authority.  No  corpora- 
tion is  empowered  by  its  charter  to  commit  an  assault  and  battery; 
yet  it  has  frequently  been  held  accountable  in  this  Commonwealth 
for  one  committed  by  its  servants.  Bills  of  a  bank  issued  without 
consideration,  and  even  stolen,  are  good  in  the  hands  of  an  innocent 
holder  for  value.  Many  other  illustrations  might  be  given,  but  enough 
has  been  said  to  show  the  principle  on  which  our  decision  rests. 

Judgment  for  the  plaintiffs. 

QUESTIONS 

1.  The  D  Company  was  incorporated  with  the  power  to  carry  on  a  manu- 
facturing business.     Its  charter  does  not  expressly  authorize  it  to  borrow 
money.    Is  the  power  to  borrow  implied  ?    If  implied,  in  what  way  or 
ways  may  the  corporation  proceed  to  borrow  money  ? 

2.  The  D  Company  signs  a  promissory  note  for  the  accommodation  of  P, 
a  stockholder  in  the  corporation.    P  indorses  the  note  to  H,  who  knows 
that  it  was  given  by  the  corporation  without  consideration.    What 
decision  in  an  action  by  H  against  the  corporation  on  the  instrument  ? 


MANAGEMENT  OF  THE  BUSINESS  UNIT  453 

3.  In  the  foregoing  case,  H  indorses  the  instrument  to  B,  who  pays  value 
for  it  before  maturity  and  without  notice  of  its  character  as  between 
the  corporation  and  P.    What  are  the  rights  of  B  on  the  note  ? 

4.  The  charter  of  the  corporation  authorizes  it  to  issue  negotiable  paper 
only  on  an  express  vote  of  the  stockholders.    The  directors,  without 
consulting  the  stockholders,  executed  a  promissory  note  in  the  name  of 
the  corporation  to  P,  who  transferred  it  to  H,  a  holder  in  due  course. 
What  are  H's  rights  on  the  instrument  ? 

5.  Does  a  corporation  have  implied  power  to  make  a  loan  of  money? 
If  so,  under  what  circumstances  and  to  what  extent  ? 


CHICAGO,  PEKIN  AND  SOUTHWESTERN  RAILROAD 
COMPANY  v.  MARSEILLES 

84  Illinois  Reports  643  (1877) 

PER  CURTAM.  On  considering  the  petition  heretofore  filed,  we 
granted  a  rehearing  to  further  consider  the  question,  whether  the 
railroad  company  had  the  power  to  contract  for  and  purchase  shares 
of  stock  of  its  own  company.  We  have  again  fully  examined  the 
question,  and,  after  considering  the  arguments  and  authorities 
bearing  on  the  question,  we  will  proceed  to  announce  our  conclu- 
sions thus  reached. 

The  rule  is  familiar,  and  it  is  not  contested,  that  such  bodies 
can  only  exercise  such  powers  as  may  be  conferred  by  the  legislative 
body  creating  them,  either  in  express  terms  or  by  necessary  implica- 
tion; and  the  implied  powers  are  presumed  to  exist  to  enable  such 
bodies  to  carry  out  the  express  powers  granted,  and  to  accomplish 
the  purposes  of  their  creation.  Such  being  the  rule,  the  question 
arises,  whether  this  corporate  body  might  make  such  a  purchase, 
or  is  it  outside  of,  and  beyond,  the  limit  of  its  power  ? 

Appellant  has  referred  us  to  a  number  of  cases  in  our  own  court, 
in  which  it  has  been  held  that  such  organizations  have  no  power  to 
release  subscribers  for  their  stock  from  paying  therefor  and  from 
their  subscriptions;  that,  when  such  subscriptions  are  intended  to  be 
fictitious  or  the  subscribers  are  released  from  payment,  it  operates  as 
a  wrong,  if  not  a  fraud,  on  the  other  subscribers  for  stock  in  the  same 
company.  But  here,  the  stock  had  been  subscribed,  paid  for,  and 
certificates  thereof  issued  to,  and  they  were  owned  and  held  by,  the 
village  at  the  time  this  contract  was  entered  into  and  executed.  So, 
the  question  is  not,  whether  appellant  may  release  the  village  from 


454  LAW  AND  BUSINESS 

paying  for  and  receiving  shares  subscribed  for,  but  whether  appellant 
has  power  to  purchase  shares  of  its  own  stock,  paid  for,  issued  to, 
and  held  by  the  village. 

In  the  case  of  Taylor  v.  Miami  Exportation  Co.,  6  Ohio  (Hammond's 
R.),  83,  it  was  held  that  a  banking  corporation  might  lawfully  receive 
shares  of  its  own  stock  from  a  solvent  debtor  and  in  discharge  of  his 
indebtedness.  The  court  went  further,  and  held  that  where  a  large 
number  of  shares  had  been  issued  to  enable  the  holder  to  vote  for  cer- 
tain persons  for  directors  at  an  approaching  election,  and,  after  the 
holder  had  thus  voted,  the  money  paid  for  the  shares  was  returned 
to  him,  and  he  restored  the  shares  to  the  bank,  as  there  was  no  loss 
sustained  by  the  transaction,  and  the  result  of  the  election  was  not 
changed,  and  while  the  court  condemned  the  transaction,  it  held  that 
equity  could  afford  no  relief,  as  no  one  had  been  injured.  It  was  also 
held  in  that  case  that,  where  the  shares  of  the  company  were  trans- 
ferred to  it  in  payment  of  such  indebtedness,  the  corporation  might 
hold  and  sell  it  as  it  did  its  other  property. 

In  the  case  of  the  City  Bank  of  Columbus  v.  Bruce,  17  N.Y.  507, 
it  appeared  that  the  board  of  directors  passed  a  resolution  that  all 
stockholders  indebted  to  the  bank  on  stock  notes,  by  a  specified  day, 
might  pay  such  debts  to  the  bank  in  its  shares  of  stock,  at  a  named 
per  cent,  and  that  not  far  from  half  the  stock  of  the  bank  was  thus 
surrendered;  and  the  court  held,  that  there  was  no  ground  for 
questioning  the  validity  of  the  transaction;  that  no  rule  of  common 
law  or  any  provision  of  the  charter  forbade  it;  and  the  Ohio  case  is 
referred  to  and  approved  by  the  court. 

In  the  case  of  Williams  v.  The  Savage  Manufacturing  Co.  3  Md. 
Ch.  R.  452,  it  was  held,  that  the  banking  corporation  had  the  right 
to  take  shares  of  their  own  stock  in  pledge  or  payment  of  indebtedness 
to  the  corporation,  and  to  reissue  the  same.  On  the  latter  proposition, 
Ex  parte  Holmes,  5  Cow.  426,  is  referred  to  by  the  court  in  its  support. 

In  the  case  of  the  State  v.  Smith,  48  Vt.  R.  266,  it  was  held,  that 
where  a  railroad  company  had  purchased  2,350  shares  of  the  stock 
of  the  company,  the  stock  did  not  merge,  and  the  legality  of  the 
purchase  seems  to  be  recognized  by  the  court.  And  in  further  support 
of  the  rule,  see  Angell  and  Ames  on  Corporation,  section  280,  where  it 
is  said  it  is  one  of  the  corporate  powers  that  may  be  legally  exercised. 

If  then,  as  in  the  cases  above  referred  to,  a  bank  may  purchase 
and  hold  its  own  shares,  no  reason  is  perceived  why  a  railroad  corpora- 
tion may  not  do  the  same  thing  and  the  case  of  the  State  v.  Smith, 


MANAGEMENT  OF  THE  BUSINESS  UNIT  45$ 

supra,  was,  the  purchase  of  stock  by  a  railroad  company,  and  of  shares 
of  its  own  stock.  These  authorities,  we  think,  fully  recognize  the 
power  of  the  directors  of  a  company,  when  not  prohibited  by  their 
charter,  to  purchase  shares  of  stock  of  their  company.  It  falls  within 
the  scope  of  the  power  of  the  directors  to  manage  and  control  the 
affairs  and  property  of  the  company  for  the  best  interests  of  the  stock- 
holders, and  when  they  have  thus  acted,  we  will  presume,  until  the  con- 
trary is  shown,  that  the  purchase  was  for  legitimate  and  authorized 
purposes. 

If  it  were  shown  that  the  purchase  was  made  to  promote  the  inter- 
ests of  the  officers  of  the  company  alone,  and  not  of  the  stockholders 
generally,  or  if  for  the  benefit  of  a  portion  of  the  stockholders  and 
not  all,  or  for  the  injury  of  all  or  only  a  portion  of  them,  or  if  operated 
to  the  injury  of  creditors,  or  would  defeat  the  end  for  which  the  body 
was  created,  or  if  it  was  done  for  any  other  fraudulent  purpose,  then 
chancery  could  interfere.  In  such  case,  Mehin  v.  The  Lemar  Insur- 
ance Co.,  80  111.  446,  and  other  cases  in  chancery  referred  to  in  appel- 
lant's brief  would  apply,  but  the  defense  cannot  be  made  at  law.  The 
case  of  Belford  Railroad  Co.  v.  Bower,  48  Pa.  St.  R.  29,  was  in  a  court 
where  there  is  no  distinction  between  actions  at  law  and  suits  in  equity, 
and  we  presume  the  defense  was  allowed  by  the  application  of  equit- 
able principles,  and  the  cases  in  the  British  courts  which  seem  to  bear 
on  the  question  were  in  equity.  Whatever  may  be  the  rights  of 
stockholders,  or  creditors,  if  there  are  any,  relief  can  only  be  made 
in  equity,  and  by  a  stockholder  or  other  cestui  que  trust. 

The  judgment  of  the  court  below  will,  therefore,  be  affirmed. 

Judgment  affirmed. 

QUESTIONS 

1.  What  is  meant  when  it  is  said  that  a  corporation  buys  its  own  stock? 
How  can  a  corporation  buy  its  own  stock  ? 

2.  What  parties  may  object  to  a  purchase  of  its  own  stock  by  a  corporation  ? 

3.  It  is  sometimes  said  that  a  corporation  can  buy  its  stock  provided  such 
a  transaction  is  not  a  fraud  upon  creditors.    How  can  the  purchase  of 
its  stock  by  a  corporation  be  a  fraud  on  creditors  ? 

4.  A  corporation  buys  its  own  stock,  (a)  for  the  purpose  of  reselling  it  at 
a  profit;   (b)  for  the  purpose  of  retiring  it.     Discuss  the  validity  of  each 
transaction. 

5.  S  appears  on  the  books  of  the  corporation  as  owner  of  ten  shares  of  stock 
but  refuses  to  pay  for  it.    In  what  way  may  the  corporation  enforce 
payment  of  the  obligation  ? 


456  LAW  AND  BUSINESS 

FRANKLIN  BANK  v.  COMMERCIAL  BANK 
36  Ohio  State  Reports  350  (1881) 

BOYNTON,  J.  We  are  met  at  the  threshold  of  the  case  with  the 
inquiry,  whether  an  action  will  lie  in  favor  of  the  plaintiff  against  the 
defendant  for  refusing  to  transfer,  on  the  books  of  the  defendant,  to 
the  name  of  the  plaintiff,  the  two  hundred  shares  of  the  capital 
stock  of  the  defendant,  represented  by  the  certificate  issued  to  Foote, 
and  by  him  pledged  to  the  plaintiff  as  security  for  the  loan  obtained. 
Such  refusal  to  so  transfer  said  stock,  and  an  alleged  consequent 
conversion  of  the  same  by  the  defendant,  constitute  the  gravamen 
of  the  plaintiff's  action. 

The  twelfth  section  of  the  act  under  which  the  two  corporations 
were  organized  and  from  which  they  derived  their  powers,  expressly 
provided,  that  no  banking  company  organized  under  its  provisions 
should  be  the  holder  or  purchaser  of  any  portion  of  its  capital  stock 
or  of  the  capital  stock  of  any  other  incorporated  company,  unless 
such  purchase  should  be  necessary  to  prevent  loss  upon  a  debt  previ- 
ously contracted  in  good  faith,  on  security  which,  at  the  time,  was 
deemed  adequate  to  insure  the  payment  of  such  debt,  independent 
of  any  lien  upon  such  stock,  i  S.  &  C.  170,  section  12.  And  by 
section  29  it  was  provided,  that  all  the  rights,  privileges,  and  franchises 
which  the  company  derived  from  the  act  should  be  forfeited,  if  the 
directors  of  the  company  should  knowingly  violate,  or  permit  the 
directors  of  the  company  to  violate,  any  of  the  provisions  of  the  act. 
That  the  stock  in  the  present  case  was  pledged  or  received  to  secure 
a  precedent  loan  is  not  claimed. 

There  would  seem  to  be  little  doubt,  either  upon  principle  or 
authority,  and  independently  of  express  statutory  prohibition  of  the 
same,  that  one  corporation  cannot  become  the  owner  of  any  portion 
of  the  capital  stock  of  another  corporation,  unless  authority  to  become 
such  is  clearly  conferred  by  the  statute.  Mutual  Savings  Bank  v. 
Meriden  Agency,  24  Conn.  159;  Franklin  Company  v.  Lewiston 
Savings  Bank,  68  Me.  43;  Central  Railroad  Co.  v.  Collins,  40  Ga. 
582.  Were  this  not  so,  one  corporation,  by  buying  up  the  majority 
of  the  shares  of  the  stock  of  another,  could  take  the  entire  management 
of  its  business,  however  foreign  such  business  might  be  to  that  which 
the  corporation  so  purchasing  said  shares  was  created  to  carry  on. 
A  banking  corporation  could  become  the  operator  of  a  railroad,  or 
carry  on  the  business  of  manufacturing,  and  any  other  corporation 


MANAGEMENT  OF  THE  BUSINESS  UNIT  457 

could  engage  in  banking  by  obtaining  the  control  of  the  bank's  stock. 
Nor  would  this  result  follow  any  less  certainly,  if  the  shares  of  stock 
were  received  in  pledge  only,  to  secure  the  payment  of  a  debt,  provided 
the  shares  were  transferred  on  the  books  of  the  company  to  the  name 
of  the  pledgee.  A  person  in  whose  name  the  stock  of  the  corporation 
stands  on  the  books  of  the  corporation,  is,  as  to  the  corporation,  a 
stockholder,  and  has  the  right  to  vote  upon  the  stock.  State  v.  White, 
42  Conn.  560;  Hoppin  v.  Bujfum,  g  R.I.  513. 

Hence,  if  the  plaintiff  appeared  on  the  books  of  the  defendant  as 
transferee  or  owner  of  the  two  hundred  shares  of  stock  represented 
by  the  certificate  to  Foote,  it  would  have  the  right  to  vote  upon  the 
stock  at  all  meetings  of  the  stockholders  of  the  defendant;  and  it 
would  only  be  necessary  for  it  to  procure  in  pledge,  as  security  for 
money  loaned,  a  majority  of  the  shares  of  the  capital  stock  of  the 
Commercial  Bank,  in  order  to  obtain  full  control  of  its  affairs,  and 
take  charge  of  its  banking  operations.  This  would  not  only  be  exercis- 
ing powers  granted  to  the  plaintiff  neither  expressly  nor  by  implica- 
tion, but  those  which  are  clearly  opposed  to  the  manifest  spirit  and 
intent,  if  not  to  the  language,  of  the  statute.  This  court  has  uniformly 
adhered  to  the  doctrine  announced  in  Straus  v.  Eagle  Insurance  Co., 
5  Ohio  St.  59,  that  corporations  have  such  powers,  and  such  only, 
as  the  act  creating  them  confers;  and  are  confined  to  the  exercise  of 
those  expressly  granted,  and  such  incidental  powers  as  are  necessary 
to  carry  into  effect  those  specifically  conferred. 

QUESTIONS 

1.  What  objections  are  there  to  a  purchase  by  a  corporation  of  stock  of 
another  corporation  ? 

2.  The  D  Company,  a  manufacturing  corporation,  received  from  S  ten 
shares  of  stock  of  the  X  Company  in  payment  of  a  debt  which  S  owed 
the  D  Company.    Discuss  the  legality  of  the  transaction. 

3.  The  P   Company  is  a  corporation  engaged  in  commercial  banking. 
It  makes  a  loan  of  $500  to  D  and  receives  from  him  ten  shares  of  stock 
of  a  manufacturing  corporation  as  security.     S,  ,a  stockholder  in  the 
P  Company,  asks  that  the  corporation  be  enjoined  from  foreclosing  its 
lien  upon  the  stock.     What  decision  ? 

4.  What  is  a  holding  company  ?     Where  does  it  get  the  power  to  hold  stock 
in  other  corporations  ?    What  is  the  purpose  of  a  holding  company  ? 

5.  Four  corporations,  engaged  in  manufacturing  cotton  seed  oil,  entered 
into  an  arrangement  by  which  they  were  to  carry  on  a  joint  business . 
They  agreed  to  select  a  committee,  composed  of  representatives  from 


458  LAW  AND  BUSINESS 

each  corporation,  and  to  turn  over  to  this  committee  the  properties  and 
machinery  of  each  mill,  to  be  managed  and  operated  by  the  committee, 
through  officers  and  agents  selected  by  them,  for  the  common  benefit; 
they  agreed  further  to  share  profits  and  losses  equally.  S,  a  stockholder 
in  one  of  the  corporations,  contends  that  the  contract  is  ultra  vires  and 
asks  that  his  corporation  be  enjoined  from  entering  into  the  joint  under- 
taking. What  decision  ? 

b)     Effect  of  Exceeding  Powers 

LONG  v.  GEORGIA  PACIFIC  RAILWAY  COMPANY 
91  Alabama  Reports  519  (1890) 

MCCLELLAN,  J.  The  case  made  by  the  amended  bill  is  this: 
On  April  23, 1883,  the  complainant,  B.  M.  Long,  and  his  wife,  Amanda 
C.  Long,  executed  to  the  Georgia  Pacific  Railway  Co.  a  deed,  upon 
valuable  consideration  presently  paid,  to  and  of  the  iron,  coal,  and  oil 
interests  and  properties  in  and  pertaining  to  certain  tracts  of  land, 
aggregating  about  4,000  acres,  the  said  Long  retaining  the  fee  of  said 
lands,  except  in  respect  to  said  mineral  interests,  and  continuing  in 
possession  thereof.  The  grantee  is  a  corporation,  and  was  and  is 
without  power  to  purchase  and  hold  said  land,  or  the  mineral  interests 
in  the  same.  The  bill  seeks  to  have  the  deed  declared  void  because 
of  the  incapacity  of  the  corporation,  and  to  have  the  same  canceled 
as  a  cloud  upon  complainant's  title.  The  bill  was  demurred  to  on 
several  grounds,  and  the  demurrer  was  sustained  generally,  the  decree 
to  that  end  being  now  assigned  as  error. 

Only  those  grounds  of  error  which  present  the  question,  whether 
a  vendor  who  has  sold,  received  payment  for,  and  conveyed  land  to  a 
corporation,  which  had  no  power  to  hold  the  same,  can  have  any 
relief  in  respect  to  the  transaction,  are  discussed  in  argument,  and  to 
these  our  consideration  will  be  confined;  since  it  is  manifest  that  the 
determination  of  this  question  in  line  with  the  decree  below,  as  we 
think  it  must  be  determined,  will  be  fatal,  not  only  to  the  present 
appeal,  but  to  complainant's  cause  of  action. 

It  is  a  thoroughly  well-settled  law  that  a  party  to  an  ultra  vires 
executory  contract,  made  with  a  corporation,  is  not  estopped  to  set 
up  the  want  of  corporate  capacity  in  the  premises  either  by  the  fact 
of  contracting,  whereby  the  power  to  contract  is  in  a  sense  admitted  or 
recognized,  or  by  the  fact  that  the  fruit  of  issues  of  the  contract  have 
been  received  and  enjoyed;  and  this,  though  the  assault  upon  the  trans- 


MANAGEMENT  OF  THE  BUSINESS  UNIT  459 

action  comes  from  the  corporation  itself.  Bank  v.  Durkin,  54  Ala. 
471 ;  Chambers  v.  Falkner,  65  Ala.  448;  Sherwood  v.  Alms,  83  Ala.  115, 
3  South.  307,  3  Am.  St.  Rep.  695 ;  Lime  Works  v.  Dismukes,  87  Ala. 
344;  6  South.  122,  5  L.R.A.  100. 

But  where  the  contract  is  fully  executed,  where  whatever  was 
contracted  to  be  done  on  either  hand  has  been  done,  a  different  rule 
prevails.  In  such  case  the  law  will  not  interfere,  at  the  instance  of 
either  party,  to  undo  that  which  it  was  originally  unlawful  to  do,  and 
to  the  doing  of  which,  so  long  as  the  contract  to  that  end  remained 
executory,  neither  party  could  have  coerced  the  other.  As  declared 
by  Mr.  Bishop,  "the  parties'  voluntary  doing  of  what  they  had 
unlawfully  agreed  places  them  in  effect,  in  the  same  position  as  if  the 
contract  had  been  originally  good;  neither  can  recover  of  the  other 
what  was  parted  with;  the  reason  for  which  is  that,  since  they  are 
equally  in  fault,  the  law  will  help  neither."  Bish.  Cont.,  section  627. 

The  former  decisions  of  this  court  are  in  line  with  this  doctrine, 
and  fully  recognize  the  distinction  between  executory  and  executed 
void  contracts,  to  the  effect  that,  while  suits  to  enforce  the  former 
may  always  be  defended  on  the  ground  of  their  invalidity,  no  relief 
prayed  upon  such  ground  can  be  granted  with  respect  to  the  latter. 
And  this  is  the  doctrine  generally  declared  by  other  courts.  Thomas 
v.  Railroad  Co.,  101  U.S.  71,  Day  v.  Buggy  Co.,  57  Mich.  146,  Parish  v. 
Wheeler,  22  N.Y.  494. 

There  is  no  question  that  the  case  presented  by  the  bill  involved 
a  contract  on  the  part  of  the  railway  company  to  buy,  and  on  the  part 
of  the  complainant  to  sell,  certain  interests  in  the  land  described. 
It  is  equally  clear  that  the  payment  of  the  agreed  price  on  the  one 
hand,  and  the  execution  of  the  conveyance  on  the  other,  fully  executed 
this  contract  on  both  sides,  left  nothing  to  be  done  by  either  party  in 
the  premises,  and  brings  the  transaction  within  the  principle  we  have 
been  considering,  which  denies  to  complainant  any  relief  in  respect 
to  it. 

The  same  conclusion  is  reached  by  another  well-established 
principle.  It  is  that  when  a  party  sells  and  conveys  property  to  a 
corporation,  which  is  without  power  to  purchase  and  hold  the  same, 
and  receives  compensation  therefor,  there  being  no  fraud  in  the 
transaction,  he  is  in  no  sense  injured  or  prejudiced  by  the  incapacity 
of  the  corporation  nor  can  he  be  heard  to  complain  of  it;  but  the 
question  beomes  one  between  the  corporation  and  the  state,  the 
sovereign  alone  having  the  right  to  impeach  the  transaction;  and, 


460  LAW  AND  BUSINESS 

until  it  supervenes  for  this  purpose  the  corporation  is  vested  with 
perfect  title  against  all  the  world  defeasible  only  on  office  found. 
Railroad  Co.  v.  Proctor,  29  Vt.  93 ;  Leasure  v.  Millegas,  7  Serg.  &  R. 
(Pa.)  313;  Goundie  v.  Water  Co.,  7  Pa.  233;  Baird  v.  Bank,  n  Serg. 
&  R.  (Pa.)  411;  Lathrop  v.  Bank,  8  Dana  (Ky.)  114,  129,  33  Am. 
Dec.  481;  Hough  v.  Land  Co.  73  111.  23,  23  Am.  Rep.  230;  Cowell  v. 
Springs  Co.,  100  U.S.  55,  25  L.  Ed.  547;  Reynolds  v.  Bank,  112  U.S. 
405,  413,  5  Sup.  Ct.  213,  28  L.  Ed.  733;  2  Morawetz,  Private  Corpora- 
tions, section  710. 

The  decree  of  the  chancellor  is  affirmed. 

QUESTIONS 

1.  What  persons  are  in  a  position  to  object  to  ultra  vires  transactions  on 
the  part  of  a  corporation  ? 

2.  In  what  possible  ways  might  an  ultra  vires  transaction  of  a  corporation 
be  treated  ?    How  should  it  be  treated  ? 

3.  Did  the  court  in  the  principal  case  decide  that  title  to  the  mineral  rights 
passed  to  the  Georgia  Pacific  Railway  Co.  ?    Or  did  the  court  merely 
decide  that  it  would  grant  no  relief  to  complainant  because  the  transac- 
tion was  executed  ? 

4.  The  D  Railway  Company  is  empowered  to  acquire  and  hold  land  for 
railway  purposes.    It  purchases  and  pays  for  a  tract  of  land  which  it 
intends  to  hold  for  speculative  purposes.    The  seller  tenders  the  money 
back  to  the  corporation  and  sues  for  the  return  of  the  property  on  the 
ground  that  the  corporation  had  no  power  to  buy  it.     What  decision  ? 

5.  The  A  Company  was  incorporated  "for  the  promotion  of  art  and  art 
education"  and  empowered  to  "acquire  and  hold  real  and  personal 
estate   to  an  amount  not   exceeding  $1,500,000."    It  had  property 
worth  about  $1,000,000.    X  conveyed  by  way  of  a  gift  conveyed  to 
the  corporation  land  worth  about  $2,000,000.    What  is  the  effect  of 
the  deed  ? 


WHITNEY  ARMS  COMPANY  v.  BARLOW 
63  New  York  Reports  62  (1875) 

The  plaintiff  is  a  corporation  organized  in  the  state  of  Connecticut, 
as  declared  by  its  charter,  for  the  purpose  of  manufacturing  every 
variety  of  firearms,  and  other  implements  of  war.  This  action  was 
brought  against  the  defendants  as  trustees  of  the  American  Seal  Lock 
Co.,  a  corporation  organized  under  the  General  Manufacturing  Act 
(chap.  40,  Laws  of  1848),  to  enforce  the  statutory  liability  to  pay 


MANAGEMENT  OF  THE  BUSINESS  UNIT  461 

the  debts  of  said  corporation  because  of  an  alleged  failure  to  make, 
publish,  and  file  annual  reports. 

Said  corporation  was  organized  in  May,  1871.  Its  capital  stock 
was  $300,000  all  of  which  was  issued  to  pay  for  certain  patent  rights 
purchased  by  the  company.  No  report  was  made  and  filed  until 
January  19,  1872,  when  a  report  was  made,  verified,  and  filed  contain- 
ing the  following  statement : 

"The  amount  of  the  capital  stock  of  this  company,  and  which 
has  been  issued  for  the  purchase  of  patent  rights  and  which  has  not 
been  paid  in  cash,  is  $300,000;  amount  of  existing  debts,  $45,383.88." 

A  report,  similar  to  the  statement  of  capital  stock,  was  filed 
January  18,  1873.  On  October  6,  1871,  said  corporation  entered 
into  a  contract  with  plaintiff  by  which  the  latter  agreed  to  manufacture 
and  deliver  20,000  railroad  locks  to  be  paid  for  sixty  days  after 
delivery.  Plaintiff  made  and  delivered  10,000  locks  under  the  con- 
tract when,  by  mutual  agreement,  the  contract  was  suspended  as  to 
the  residue.  The  evidence  as  to  the  time  of  delivery  was  conflicting 
and  uncertain,  but  the  balance  of  testimony  was  to  the  effect  that  a 
few  were  delivered  in  December,  1871 ;  the  greater  portion  in  January, 
and  a  few  in  February,  1872.  Two  notes  were  given  by  defendant's 
company  for  the  purchase  price  at  two  months,  one  dated  January  24, 
1872,  the  other  January  31,  1872. 

The  court  directed  a  verdict  for  the  plaintiff  for  the  amount  of 
the  indebtedness,  which  was  rendered  accordingly. 

ALLEN,  J.  [After  discussing  the  sufficiency  of  the  reports  filed 
by  the  defendant  company,  the  court  proceeds]:  As  it  is  left  in 
doubt  whether  some  portion  of  the  debt  did  not  accrue  during  the 
default  of  1871,  and  as  other  questions  may  arise,  it  is  necessary  to 
consider  the  other  objections  taken  by  the  appellant  to  the  judgment. 

It  must  be  conceded  that  the  manufacturing  and  vending  of 
" railroad  locks"  is  not  within  the  purpose  for  which  the  plaintiff 
was  incorporated,  or  within  the  powers  conferred  by  its  charter. 
Neither  is  such  business  incidental  to  the  purposes  of  the  incorpora- 
tion, or  in  any  way  necessary  to,  or  as  far  as  appears  even  an  aid  in, 
the  exercise  of  the  powers  conferred  upon  the  plaintiff  by  its  constitu- 
tion, so  that  it  could  be  regarded  as  among  the  implied  powers  granted 
by  the  legislature  and  assumed  by  the  corporators. 

Did  the  question  now  made  arise  upon  an  application  by  the 
stockholders  and  corporators  to  restrain  the  corporate  agents  from 
applying  the  corporate  funds  to  purposes  foreign  to  the  corporation 


462  LAW  AND  BUSINESS 

or  engaging  in  business  outside  of  that  for  which  the  company  was 
formed,  or  on  proceedings  by  the  sovereign  power  to  annul  the  charter 
for  an  abuse  of  the  powers  granted,  or  in  a  proceeding  to  enforce  and 
for  the  performance  of  an  executory  contract,  where,  upon  a  rescission 
or  annulling  of  the  agreement,  both  parties  would  have  the  same  posi- 
tion as  if  no  contract  had  been  made,  the  rules  of  decision  would  be 
different  from  those  which  must  prevail  in  the  present  action.  In  either 
of  the  cases  suggested  it  is  very  likely  the  courts  would  be  compelled 
to  give  full  effect  to  the  objection  and  hold  the  business  unauthorized 
and  a  violation  of  the  charter,  and  a  forfeiture  of  the  chartered  rights 
and  the  contract  null,  and  refuse  to  perform  it  or  give  effect  to  it. 
The  manufacture  of  the  locks,  or  contract  to  sell  them  to  the  Seal 
Lock  Co.,  were  not  acts  immoral  in  themselves  or  forbidden  by  any 
statute,  neither  mala  in  sese  or  mala  prohibiia,  so  as  to  make  the 
contract  illegal  and  incapable  of  being  the  foundation  of  an  action; 
such  a  contract  as  the  law  will  not  recognize  or  enforce,  but  applying 
the  maxim,  ex  facto  itticito  non  oritur  actio,  leaves  the  parties  as  it 
finds  them. 

When  acts  of  corporations  are  spoken  of  as  ultra  vires,  it  is  not 
intended  that  they  are  unlawful  or  even  such  as  the  corporation  cannot 
perform,  but  merely  those  which  are  not  within  the  powers  conferred 
upon  the  corporation  by  the  act  of  its  creation,  and  are  inferred  upon 
the  corporation  by  the  acts  of  its  creation,  and  are  in  violation  of  the 
trust  reposed  in  the  managing  board  by  the  shareholders,  that  the 
affairs  shall  be  managed  and  the  funds  applied  solely  for  carrying 
out  the  objects  for  which  the  corporation  was  created.  Earl  of 
Shrewsbury  v.  North  Staffordshire  Railway  Co.,  L.R.  i  Eq.  593;  Taylor 
v.  Chichester  &•  Midhurst  Railway  Co.,  L.R.,  2  Exch.  356;  Bissell  v. 
Mich.  C.  R.  Co.,  2 2  N.Y.  258. 

Whether  the  contract  as  originally  made  was  ultra  vires  is  not  a 
very  important  inquiry  at  this  time.  If  it  was,  the  state  under  whose 
sovereignty  it  dwells  and  by  whose  act  and  favor  it  exists,  has  no 
interest  in  arresting  its  action  for  the  recovery  of  moneys  equitably 
due  upon  a  contract  fully  executed  and  a  work  fully  accomplished, 
whatever  may  be  its  right  to  annul  its  charter.  The  shareholders 
whose  confidence  has  been  abused  and  whose  funds  have  been  diverted 
from  their  proper  use,  have  a  direct  interest  in  reclaiming  and  restoring 
to  proper  custody  and  applying  to  legitimate  uses  the  funds  which 
have  been  diverted  and  improperly  used  for  purposes  dehors  the 
legitimate  business  of  the  corporation.  The  plea  of  ultra  vires  should 


MANAGEMENT  OF  THE  BUSINESS  UNIT  463 

not  as  a  general  rule  prevail,  whether  interposed  for  or  against  a 
corporation,  when  it  would  not  advance  justice,  but  on  the  contrary 
would  accomplish  a  legal  wrong. 

Here  as  between  two  corporations,  the  debtor  and  creditor  corpo- 
ration, the  contract  has  been  fully  performed  by  the  creditor,  the 
plaintiff  in  this  action,  and  the  Seal  Lock  Co.  has  received  the 
full  consideration  of  its  promise  to  pay.  The  plaintiff  has  parted  with 
its  property  to  the  latter  corporation,  and  unless  a  legal  liability 
exists  on  the  part  of  the  latter  to  pay,  the  plaintiff  can  neither  reclaim 
the  property  nor  recover  compensation,  and  under  this  technical 
plea  a  great  wrong  will  be  perpetuated.  A  purchaser  who  acquires 
by  contract,  and  under  an  agreement  to  pay  for  it,  the  property  of 
a  corporation  cannot  defeat  the  claim  for  the  purchase  price  by 
impeaching  the  right  of  the  corporation  to  become  the  owner  of  the 
property.  One  who  has  received  from  a  corporation  the  full  consider- 
ation of  his  engagement  to  pay  money  either  in  services  or  in  property, 
cannot  avail  himself  of  the  objection  that  the  contract  thus  fully 
performed  by  the  corporation  was  ultra  -vires,  or  not  within  its 
chartered  privileges  and  powers.  It  would  be  contrary  to  the  first 
principles  of  equity  to  allow  such  a  defense  to  prevail  in  an  action  by 
the  corporation. 

It  is  now  very  well  settled  that  a  corporation  cannot  avail 
itself  of  the  defense  of  ultra  vires  when  the  contract  has  been  in  good 
faith  fully  performed  by  the  other  party,  and  the  corporation  has  had 
the  full  benefit  of  the  performance  and  qf  the  contract.  If  an  action 
cannot  be  brought  directly  upon  the  agreement  either  equity  will 
grant  relief  or  an  action  in  some  other  form  will  prevail.  The  same 
rule  holds  e  converse.  If  the  other  party  has  had  the  benefit  of  the 
contract  fully  performed  by  the  corporation,  he  will  not  be  heard 
to  object  that  the  contract  and  performance  were  not  within  the 
legitimate  powers  of  the  corporation. 

The  only  justification  for  such  a  plea  by  an  individual  sued 
upon  a  contract  with  a  corporation  is  that  the  obligation  is  not 
mutual,  as  the  other  party,  the  corporation,  would  not  be  bound  by 
it.  The  objection  to  such  a  defense  in  an  action  upon  an  executed 
contract  is  given  by  TINDAL,  C.  J.,  in  these  words: 

Upon  the  general  ground  of  reason  and  justice,  no  such  answer  can  be 
set  up.  The  defendants  having  had  the  benefit  of  the  performance  by  the 
corporation  of  the  several  stipulations  into  which  they  entered,  have 
received  the  consideration  of  their  own  promises;  such  promise  by  them  is 


464  LAW  AND  BUSINESS 

therefore  not  nudum  pactum;  they  never  can  want  to  sue  the  corporation 
upon  the  contract  in  order  to  enforce  the  performance  of  their  stipulations 
which  have  been  already  voluntarily  performed,  and  therefore  no  sound 
reason  can  be  suggested  why  they  should  justify  their  refusal  to  perform 
the  stipulations  made  by  them  on  the  ground  of  inability  of  the  corporation, 
which  suit  they  can  never  want  to  sustain. 

In  Jones  v.  Barlow,  62  N.Y.  302,  we  held  that  the  liability  of  a 
trustee,  upon  the  failure  of  the  corporation  to  make  the  annual  report 
called  for  by  the  statute,  was  coextensive  and  concurrent  with  that 
of  the  corporation  quoad  the  debt  which  was  sought  to  be  fixe'd  upon 
him.  That  there  must  be  not  only  an  existing  debt  against  the 
corporation  but  a  debt  presently  due  and  for  the  recovery  of  which 
an  action  would  lie  against  the  corporation;  and  that  if  the  corpora- 
tion was  not  suable  by  reason  of  a  novation  or  renewal  of  the  debt, 
an  action  would  not  lie  against  the  trustee.  We  gave  the  defendant 
the  benefit  of  that  rule.  Applying  the  same  principles  here,  and  for 
the  reasons  assigned  in  the  prevailing  opinion  there  given,  we  are 
constrained  to  hold  that  if  a  valid  debt  exists  against  the  corporation, 
to  which  there  is  no  good  defense  in  law  or  equity  in  behalf  of  the 
corporation,  it  must  be  adjudged  and  held  a  valid  debt  where  the 
trustee  is  sought  to  be  charged  with  its  payment.  This  necessarily 
follows  the  converse  of  the  decision  in  Jones  v.  Barlow,  62  N.Y.  202. 

The  first  step  is  taken  in  establishing  the  liability  of  the  trustees 
where  the  facts  proved  would  entitle  the  plaintiff  to  a  judgment 
against  the  corporation  for  the  debt  in  suit.  That  establishes  the 
existence  of  a  debt  against  the  corporation;  and  upon  proofs  of  the 
other  facts,  viz.,  the  trusteeship  and  default  in  making  the  report, 
the  liability  of  the  trustee  is  proved  and  judgment  must  go  against 
him.  Other  questions  may  arise  in  respect  to  the  report  of  1873, 
and  we  do  not  pass  upon  that. 

The  judgment  must  be  reversed  and  a  new  trial  granted,  costs 
to  abide  event.  All  concur. 

Judgment  reversed. 

QUESTIONS 

1.  Why  was  the  action  in  this  case  brought  against  the  defendants  ?    Why 
was  it  not  brought  against  their  corporation  ? 

2.  The  court  said  that  the  contract  in  this  case  was  ultra  vires  and  yet 
said  that  the  plaintiff  could  enforce  it.     Upon  what  theory  does  the 
court  base  this  decision  ? 


MANAGEMENT  OF  THE  BUSINESS  UNIT  465 

3.  Suppose  in  the  principal  case  that  the  Whitney  Arms  Co.  had  received 
payment  from  the  Seal  Lock  Co.  for  the  railroad  locks  but  that  it  had 
refused  to  deliver  any  railroad  locks  to  the  latter  company,  what  would 
have  been  the  rights  of  the  Seal  Lock  Co.  against  the  Whitney  Arms  Co.  ? 

4.  The  D  Company  in  excess  of  its  powers  contracts  to  buy  land  from  P. 

(a)  P  sues  the  D  Company  for  its  refusal  to  accept  and  pay  for  the  land. 

(b)  The  D  Company  sues  P  for  his  refusal  to  sell  the  land.    What 
decision  under  each  hypothesis  ? 

5.  The  D  Railway  Company  contracted  to  buy  10,000  steel  rails  from  P. 
The  D  Company  did  not  need  the  rails  for  corporate  purposes  but 
contracted  for  them  to  resell  at  a  profit.     P  sued  the  D  Company  for 
its  refusal  to  accept  and  pay  for  the  rails.     The  company  contended 
that  the  contract  was  illegal  because  it  had  no  power  to  buy  steel  rails 
for  speculative  purposes.    What  decision  ? 

MALLORY  v.  HANAUR  OIL  WORKS 

86  Tennessee  Reports  598  (1888) 

Action  of  unlawful  detainer  by  the  Hanaur  Oil  Works  against 
the  defendant  to  recover  possession  of  property  surrendered  to  the 
defendants  under  a  combination  or  partnership  agreement.1 

LURTON,  J.  It  is  next  argued  that  if  the  contract  be  ultra  vires, 
that  it  is  an  executed  contract,  and  that  the  courts  will  not  in  such 
case  interfere.  This  contract  had  yet  a  little  over  a  year  to  run. 
The  possession  of  the  Hanaur  mills  had  been  obtained  under  it, 
and  was  withheld  under  a  claim  of  right  by  reason  of  the  supposed 
validity  of  the  partnership. 

As  to  the  unexpired  time,  during  which  the  defendants  in  error 
might  be  deprived  of  the  use  of  their  property,  and  subjected  to  the 
hazards  of  another  year's  operations,  it  was  not  an  executed  contract. 
The  possession  obtained  under  this  contract  was  illegal,  and  it  was 
the  duty  of  the  officers  of  the  Hanaur  Company  to  renounce  the 
arrangement  and  recover  the  possession.  There  are  cases  where,  an 
invalid  contract  being  fully  executed,  the  courts  will  not  entertain 
a  suit  to  recover  money  or  property  transferred  under  such  agreement, 
or,  if  they  do  interfere,  will  do  so  only  upon  equitable  terms.  But 
the  defense  here  made  would  result,  if  successful,  in  enforcing  the 
performance  of  the  unexecuted  part  of  a  void  contract.  It  is  not  a 
case  of  contract  fully  executed.  The  part  remaining  to  be  executed 

1  In  an  omitted  part  of  the  opinion  the  court  held  that  a  contract  of  partner- 
ship between  Hanaur  Oil  Works  and  three  other  corporations  was  ultra  vires. 


466  LAW  AND  BUSINESS 

is  a  material  part,  and  is  beyond  the  power  of  defendant  in  error  to 
make  or  sanction.  Having  entered  into  it,  it  was  its  duty  to  rescind 
or  abandon  it. 

Tn  a  case  where  a  lease  had  been  made,  by  a  railway  company 
for  a  term  of  twenty  years  of  its  road  and  franchises,  and  which, 
after  a  lapse  of  five  years,  it  rescinded,  and  was  thereupon  sued  for 
damages  under  a  clause  in  the  lease  which  authorized  rescission,  and 
provided  for  compensation  for  unexpired  term,  the  Supreme  Court 
of  the  United  States  said: 

It  is  not  a  case  of  contract  fully  executed.  The  very  nature  of  the  suit 
is  to  recover  damages  for  non-performance  As  to  this  it  is  not  an  executed 
contract.  Not  only  so,  but  it  is  a  contract  forbidden  by  public  policy,  and 
beyond  the  power  of  defendant  to  make.  Having  entered  into  the  agree- 
ment, it  was  the  duty  of  the  company  to  rescind  or  abandon  it  at  the  earliest 
moment.  This  duty  was  independent  of  the  clause  which  gave  them  the 
right  to  do  it.  Though  they  delayed  its  performance  several  years,  it 
was  nevertheless  a  rightful  act  when  done.  Can  this  performance  of  a  legal 
duty— a  duty  both  to  stockholders  and  the  public— give  to  plaintiffs  a 
right  of  action?  Can  they  found  such  a  right  on  an  agreement  void  for 
want  of  corporate  authority  and  forbidden  by  the  policy  of  the  law  ?  To 
hold  that  they  can,  is,  in  our  opinion,  to  hold  that  any  act  performed  in 
executing  a  void  contract  makes  all  its  parts  valid,  and  that  the  more  that 
is  done  under  a  contract  forbidden  by  law  the  stronger  is  the  claim  to  its 
enforcement  by  the  courts.  [Thomas  v.  Railroad  Co.,  101  U.S.  86,  25 
L.  Ed.  950.] 

That  the  defendant  in  error  has  submitted  to  a  void  contract  by 
which  it  has  been  deprived  of  the  use  of  its  property  for  two  years, 
furnishes  no  sound  reason  why  it  shall  submit  for  three  years.  To 
hold  that  it  did  would  be  to  apply  the  doctrine  of  part  performance 
in  a  way  to  perfect  and  legalize  illegal  contracts  which  were  partly 
performed.  We  have  not  deemed  it  necessary  to  consider  the  question 
of  the  legality  of  such  a  combination  or  corporations  as  one  tending 
to  create  a  monopoly,  for  the  ground  upon  which  we  place  the  case 
needs  no  additional  prop.  The  question  of  the  validity  of  such  an 
agreement  is  a  very  grave  one,  but  need  not  now  be  considered. 

The  suggestion  that,  if  this  contract  was  void,  yet  nevertheless 
it  operated  to  convert  the  managers  of  the  combination  into  tenants 
from  year  to  year,  and  that  tenancy  could  be  terminated  only  at  the 
end  of  a  year,  and  upon  six  months'  notice,  is  not  tenable.  The 
relation  of  landlord  and  tenant  never  existed  under  the  contract  if 


MANAGEMENT  OF  THE  BUSINESS  UNIT  467 

it  be  considered  as  valid,  and  could  not  spring  from  its  illegality. 
The  Hanaur  Mill  Co.  had  a  right  to  repudiate  the  arrangement  at 
any  time  and  it  was  the  duty  of  plaintiffs  in  error  to  have  at  once 
surrendered  possession.  The  service  of  a  writ  in  a  suit  of  unlawful 
detainer  was  the  only  notice  they  could  legally  demand.  When  the 
action  of  unlawful  detainer  will  lie  under  our  statutes,  no  other  notice 
than  the  suing  out  of  a  writ  is  necessary.  Code  Mill  &  V.  4082. 

The  result  is  that  we  hold  that  there  was  no  error  in  the  charge 
of  the  circuit  judge,  or  his  refusal  to  charge,  and  the  judgment  must 
be  affirmed  with  costs. 

QUESTIONS 

1.  Was  the  action  in  this  case  brought  on  the  ultra  vires  contract  ?     If  not, 
what  was  the  nature  of  the  proceedings?    On  what  theory  was  the 
corporation  in  this  case  permitted  to  get  its  property  back  ? 

2.  The  D  Company,  without  power  to  do  so,  leased  land  from  P  for  a 
period  of  years  at  an  agreed  rental  of  $1,000  a  year.     The  corporation 
went  into  possession  of  the  land  but  refused  to  pay  the  rent  at  the  end 
of  the  first  year.     This  is  an  action  by  P  to  have  the  contract  declared 
void  and  to  recover  possession  of  his  property.    What  decision  ? 

3.  In  the  foregoing  case,  P  brings  an  action  to  recover  the  rental  for  the 
first  year.     What  decision  ? 

4.  The  P  Company,  without  power  to  do  so,  leased  corporate  land  to  D 
for  a  period  of  five  years  at  an  agreed  rental  of  $1,000.    At  the  end  of 
the  first  year  the  corporation  brought  proceedings  to  have  the  lease 
declared  void  and  to  recover  possession  of  its  property.    What  decision  ? 

5.  In  the  foregoing  case,  D  refused  to  pay  the  agreed  rental.    The  corpora- 
tion brings  an  action  for  $1,000.     What  decision  ? 

2.     Distribution  of  the  Powers  of  the  Unit 

a)    Powers  of  the  Majority 

JOHNSTON  v.  BUTTON 

27  Alabama  Reports  245  (1855) 

Action  by  Button's  administrator  against  Johnston  &  Co.  The 
latter  firm  was  composed  of  Johnston,  Fogg  and  Vanderslice.  The 
notes  were  drawn  and  signed  in  the  firm  name  by  Fogg.  They  were 
dated  Becember  17,  1852,  and  January  8,  1853.  Johnston  denied 
liability  on  the  ground  that  prior  to  the  giving  of  the  notes  he  had 
given  personal  notice  to  Button  and  had  also  published  a  notice  in  the 
newspaper  that  he,  Johnston,  would  not  be  bound  by  or  for  any 


468  LAW  AND  BUSINESS 

future  contracts  made  by  Fogg  without  Johnston's  consent.  Other 
facts  appear  in  the  opinion.  Judgment  for  plaintiff  and  defendants 
appeal. 

GOLDTHWAITE,  J.  The  evidence  in  this  case  tended  to  show 
that  the  appellants  and  one  Vanderslice  carried  on  in  copartnership 
a  steam  sawmill,  which,  by  the  articles  of  the  copartnership,  was  to 
continue  at  least  five  years;  that  the  note  sued  on  was  given  with 
the  concurrence  of  two  of  the  partners,  Fogg  and  Vanderslice,  for 
supplies  necessary  for  the  hands  engaged  in  carrying  on  the  mill, 
which  had  been  ordered  by  one  of  them.  Upon  these  facts  alone, 
there  can  be  no  doubt  that  the  firm  would  be  bound.  The  furnishing 
of  supplies  to  those  engaged  in  the  immediate  direction  of  the  business 
was  essential  to  the  conducting  of  it,  and  within  the  scope  of  the 
purpose  for  which  the  individuals  had  associated;  and  the  authority 
of  either  of  the  partners  to  purchase  such  supplies,  and  give  the  note 
of  the  firm,  cannot  be  questioned. 

The  principal  ground  of  objection,  however,  is,  that  the  evidence 
proved  that,  before  the  goods  were  furnished  and  the  note  given, 
the  appellant,  Johnston,  gave  notice  to  the  public  that  he  would  not 
be  responsible  for  any  future  debt  contracted  on  account  of  the 
copartnership,  and  that  this  notice  was  brought  home  to  the  party 
with  whom  the  debt  was  contracted;  and  it  is  insisted  that  its  effect 
was  to  revoke  the  authority  of  the  other  partners,  so  far  as  he  was 
concerned,  to  bind  the  firm  from  that  time. 

It  is  to  be  observed,  that  in  the  present  case  the  contract  was 
concurred  in  by  two  members  of  the  firm,  and  the  question,  therefore, 
is,  as  to  the  right  of  the  majority  to  bind  the  other  partners,  against 
their  dissent,  as  to  matters  appertaining  to  the  common  business, 
and  in  the  absence  of  any  stipulation  conferring  that  power  in  the 
articles  of  copartnership.  This  question  is  a  new  one  in  this  court, 
and  indeed  we  have  found  no  case  in  which  it  has  been  expressly 
decided.  Both  in  England  and  the  United  States,  there  are  cases 
which  assert  the  general  proposition,  that  a  partner  may  protect 
himself  against  the  consequences  of  a  future  contract,  by  giving  notice 
of  his  dissent  to  the  party  with  whom  it  is  about  to  be  made.  Gallway 
v.  Matthew,  10  East,  264;  Willis  v.  Dyson,  i  Stark,  164;  Vice  v. 
Fleming,  i  Y.  &  Jerv.  227,  230;  Leavitt  v.  Peck,  3  Conn.  125,  post; 
Feigley  v.  Sponeberger,  5  W.  &  S.  564;  Monroe  v.  Connor,  15  Me. 
178,  32  Am.  Dec.  148.  And  where  the  firm  consists  of  but  two  persons 
and  there  is  nothing  in  the  articles  to  prevent  each  from  having  an 


MANAGEMENT  OF  THE  BUSINESS  UNIT  469 

equal  voice  in  the  direction  and  control  of  the  common  business, 
the  correctness  of  the  proposition  cannot  be  questioned.  In  such 
case,  the  duty  of  each  partner  would  require  him  not  to  enter  into  any 
contract  from  which  the  other  in  good  faith  dissented;  and  if  he  did, 
it  would  be  a  violation  of  the  obligations  which  were  imposed  by  the 
nature  of  the  partnership.  It  would  not,  in  fact,  be  the  contract  of 
the  firm;  and  the  party  with  whom  it  was  made,  having  notice, 
could  not  enforce  it  as  such.  So,  if  the  firm  was  composed  of  more 
than  two  persons,  and  one  of  them  dissented,  the  party  with  whom 
the  contract  was  made  acts  at  his  peril,  and  cannot  hold  the  dissenting 
partner  liable,  unless  his  liability  results  from  the  articles  or  from 
the  nature  of  the  partnership  contract.  All  the  cases  can  be  sustained 
on  this  principle;  and  it  is  in  strict  analogy  with  the  civil  law,  which 
holds  where  the  stipulations  of  the  partnership  expressly  intrust  the 
direction  and  control  of  the  business  to  one  of  the  partners,  that  the 
dissent  of  the  other  would  not  avail,  if  the  contract  was  made  in  good 
faith  (Pothier,  Traite  du  Com.  de  Soc.,  No.  71,  90);  and  such  also, 
we  think,  is  the  rule  of  the  common  law.  Const,  v.  Harris,  Turn. 
&  Russ,  496;  Story  on  Partnership,  section  121.  Were  it  otherwise, 
it  would  be  denying  the  parties  the  right  to  make  their  own  contracts. 
If  our  views  as  to  the  governing  force  of  express  stipulations  are 
correct,  the  effect  of  such  terms  or  conditions  as  result  by  clear 
implication  from  the  articles,  or  arise  out  of  the  nature  of  the  partner- 
ship must  be  the  same.  It  is  as  if  they  had  been  expressly  provided. 
Now,  whenever  a  partnership  is  formed  by  more  than  two  persons, 
we  think  that  in  the  absence  of  any  express  provision  to  the  contrary, 
there  is  always  an  implied  understanding  that  the  acts  of  the  majority 
are  to  prevail  over  those  of  the  minority,  as  to  all  matters  within  the 
scope  of  the  common  business;  and  such  we  understand  to  be  the 
doctrine  asserted  by  LORD  ELDON  in  Const,  v.  Harris,  supra,  and 
such  was  the  opinion  of  JUDGE  STORY;  Story  on  Partnership,  section 
123;  3  Kent's  Com.  (5th  ed.)  45.  The  rule  as  thus  laid  down,  is 
certainly  more  reasonable  and  just,  than  to  allow  the  minority  to 
stop  the  operations  of  the  concern,  against  the  views  of  the  majority. 
We  do  not  say  that  it  would  be  a  bona  fide  transaction,  such  as  to  bind 
the  firm,  if  the  majority  chose  wantonly  to  act  without  information 
to  or  consultation  with  the  minority  (Story  on  Partnership,  sec.  123); 
but,  when,  as  in  the  present  case,  the  one  partner  has  given  notice, 
and  expressed  his  dissent  in  advance,  there  could  be  no  reason  or 
propriety  in  requiring  him  to  be  consulted  by  the  other  two. 


470  LAW  AND  BUSINESS 

We  do  not  consider  the  cases  to  which  we  have  been  referred, 
holding  that  one  partner  has  the  right  at  pleasure  to  dissolve  a 
partnership,  although  the  articles  provide  that  it  is  to  continue  for  a 
specified  term  (Marquand  v.  New  York  Insurance  Co.,  17  Johns. 
525;  Skinner  v.  Dayton,  19  7d.  513,  10  Am.  Dec.  286),  as  having  any 
bearing  on  the  case  under  consideration.  Conceding  they  are  law — 
which  is  doubtful  (Story  on  Partnership,  sec.  275,  n.  3,  and  cases 
cited) — the  decision  rests  solely  upon  the  ground  that  the  limitation 
on  the  right  of  dissolution  is  incompatible  with  the  nature  of  the 
corpartnership  contract;  and  this  principle  does  not  militate  against 
the  position  we  have  asserted.  The  dissent,  in  the  present  case, 
cannot  be  regarded  as  a  dissolution,  for,  if  effectual,  it  would  not 
necessarily  produce  that  result,  although  it  might  operate  to  change 
the  mode  of  conducting  the  business.  In  other  words,  it  might  be 
carried  on  without  contracting  debts. 

Our  conclusion  is,  that  the  act,  being  concurred  in  by  two  of  the 
partners,  was,  under  the  circumstances,  the  act  of  the  firm;  and  that 
the  charge,  asserting  the  proposition  that  the  dissent  of  one  partner 
against  the  other  two  would  necessarily  exonerate  him,  was  properly 
refused. 

Judgment  affirmed. 
QUESTIONS 

1.  Why  was  the  dissent  of  Johnston  not  an  act  of  dissolution?    Even  if 
his  dissent  had  been  construed  to  be  a  dissolution  would  he,  nevertheless, 
have  been  liable  on  the  notes  in  question  ? 

2.  In  the  absence  of  an  agreement  to  the  contrary  in  whom  does  the  power 
to  manage  the  affairs  of  the  partnership  rest  ? 

3.  A,  B,  C,  D,  and  E  are  partners  in  the  hardware  business.     The  majority, 
over  the  objection  of  the  minority,  vote  to  add  to  the  business  a  line  of 
plumbing  supplies  which  they  had  not  hitherto  carried.     What  are  the 
rights,  if  any,  of  the  minority  ? 

4.  The  majority  vote  to  go  out  of  the  hardware  business  and  go  into  the 
business  of  selling  plumbing  supplies.      What  are  the  rights,  if  any, 
of  the  minority  ? 

5.  (a)  The  majority  vote  to  increase  the  capital  of  the  business,  (6)  to 
decrease  the  capital,  (c)  to  change  the  name  of  the  firm,  (d)  to  change 
the  location  of  the  business.     What  are  the  rights,  if  any,  of  the  minority 
under  each  of  the  foregoing  hypotheses  ? 

6.  The  majority  vote  to  go  out  of  business  before  the  time  contemplated 
in  the  articles  of  partnership.     Can  B  prevent  this  premature  dissolu- 
tion ?    If  the  dissolution  takes  place  in  spite  of  his  objection,  has  he  any 
remedy  ? 


MANAGEMENT  OF  THE  BUSINESS  UNIT  471 

DUDLEY  v.  KENTUCKY  HIGH  SCHOOL 

9  Bush's  Kentucky  Reports  576  (1873) 

LINDSAY,  J.  The  order  from  which  this  appeal  is  prosecuted 
must  be  regarded  as  final.  The  special  demurrer  to  the  jurisdiction 
of  the  court  was  sustained,  and  a  judgment  rendered  against  appellant 
for  the  cost  of  the  entire  proceeding.  This  is  equivalent  to  dismissing 
the  petition  for  the  want  of  jurisdiction  in  the  court,  and  effectually 
precludes  appellant  from  taking  further  steps  in  the  litigation  to  obtain 
the  relief  desired. 

The  object  of  the  corporation  was  to  establish  and  maintain  a 
high  school,  and  not  to  make  money,  and  it  has  no  legal  right  to  engage 
in  speculations  or  investments  in  real  estate  for  the  last-named 
purpose;  but  it  has  the  expressly  delegated  power  "to  receive  and 
hold  for  the  benefit  of  said  high  school  any  lands,  tenements,  etc., 
by  gift,  devise,  donation,  contract,  or  purchase."  It  is  not  complained 
that  the  house  and  lands  purchased  or  about  to  be  purchased  from 
Gaines  are  not  to  be  held  for  the  benefit  of  the  school,  but  that  the 
corporation  is  unable  to  pay  the  contemplated  price,  and  that  the 
inevitable  result  of  the  purchase,  if  consummated,  will  be  the  bank- 
ruptcy of  the  corporation  and  the  failure  of  the  project  to  establish 
the  school. 

It  is  true  that  a  majority  of  stockholders,  no  matter  how  great, 
have  not  the  right  to  divert  the  funds  of  a  joint-stock  incorporated 
company  to  any  other  than  the  purposes  for  which  it  was  organized ; 
and  if  such  funds  are  about  to  be  so  diverted,  a  stockholder  may 
file  a  bill  in  equity  against  the  company  to  restrain  it  by  injunction 
from  such  diversion  or  misapplication.  Baghaw  v.  Eastern  Counties 
Railway  Co.,  7  Hare,  114;  i  Beaven,  i ;  March  v.  Eastern  Railway  Co., 
40  N.H.  548,  77  Am.  Dec.  732.  But  relief  will  not  be  granted  unless 
the  corporation  is  about  to  do  some  act  outside  of  the  scope  of  its 
authority,  or  in  disobedience  to  the  provisions  of  its  constitution, 
for  so  long  as  it  exercises  the  powers  granted  by  the  charter  the  acts 
of  the  company  must  be  treated  by  the  courts  as  the  acts  of  all  the 
stockholders. 

Each  and  every  stockholder  contracts  that  the  will  of  the  majority 
shall  govern  in  all  matters  coming  within  the  limits  of  the  act  of 
incorporation;  and  in  cases  involving  no  breach  of  trust,  but  only 
error  or  mistake  of  judgment  upon  the  part  of  the  directors  who 
represent  the  company,  individual  stockholders  have  no  right  to 


472  LAW  AND  BUSINESS 

appeal  to  the  courts  to  dictate  the  line  of  policy  to  be  pursued  by 
the  corporation.  Angell  and  Ames  on  Corporations,  section  393. 
Nor  does  the  irregular  manner  in  which  the  board  of  directors  voted 
upon  the  proposition  to  make  the  purchase  from  Gaines  authorize 
the  chancellor  to  interpose  to  prevent  its  consummation.  In  the  case 
of  Foss  v.  Har bottle,  2  Hare,  461,  where  the  object  of  the  bill  in  equity 
was  to  obtain  relief  against  what  was  alleged  to  be  a  fraud  committed 
by  certain  of  the  directors  in  an  incorporated  company,  which  fraud 
consisted  in  the  sale  to  themselves,  as  representatives  of  the  company, 
of  lands  in  which  they  were  individually  interested,  VICE-CHANCELLOR 
VIGRAM  held  that  although  the  act  might  be  voidable  by  the  company, 
yet,  inasmuch  as  a  majority  of  the  proprietors  might  at  a  general 
meeting  confirm,  he  declined  to  interfere,  saying,  "While  the  court 
may  be  declaring  the  acts  complained  of  to  be  void,  at  the  suit  of  the 
present  plaintiffs,  who  in  fact  may  be  the  only  proprietors  who  dis- 
approve of  them,  the  governing  body  of  proprietors  may  defeat  the 
decree  by  lawfully  resolving  upon  the  confirmation  of  the  very  acts 
which  are  the  subject  of  the  suit."  So  in  this  case,  while  it  may  be 
that  the  corporation  has  the  right  to  avoid  the  purchase  from  Gaines, 
because  one  of  the  directors,  without  whose  vote  the  proposition 
would  have  been  rejected,  was  allowed  to  vote  by  proxy,  yet  it  may 
be  that  Dudley  is  the  only  stockholder  who  disapproves  of  the  pur- 
chase, and  it  might  result  that,  at  the  time  the  court  was  protecting 
him  against  the  payment  of  his  subscription  because  of  the  unauthor- 
ized action  of  the  directors,  a  majority  of  the  stockholders  in  general 
meeting  might  ratify  or  have  already  ratified  the  purchase,  and  have 
bound  Dudley  under  his  contract  of  subscription  to  submit  to  their 
will  thus  regularly  and  legally  expressed. 

It  may  be  that  the  price  agreed  to  be  paid  for  the  house  and 
lands  is  greatly  more  than  its  value,  but  about  this  matter  the  opinion 
of  the  majority  of  the  stockholders  as  expressed  through  the  directory 
must  control,  and  so  far  as  the  action  of  the  court  in  this  case  is 
concerned,  it  is  immaterial  whether  the  corporation  acted  wisely  or 
unwisely  in  contracting  a  debt  which  possibly  it  will  be  unable  to  pay. 
The  charter  empowers  it  to  make  purchases  of  land,  to  contract 
debts,  and  to  issue  bonds  to  an  amount  not  over  two-thirds  of  the 
stock  subscribed;  and  if  these  powers  are  so  exercised  as  to  result  in 
loss  to  the  stockholders,  it  is  a  misfortune  against  which  the  courts 
can  afford  no  protection. 

Judgment  affirmed. 


MANAGEMENT  OF  THE  BUSINESS  UNIT  473 

QUESTIONS 

1.  The  court  said  in  this  case  that  the  will  of  the  majority  controls  in  the 
management  of  the  corporation.     What  is  the  basis  of  this  rule  ?     What 
is  the  extent  of  the  application  of  the  rule  ? 

2.  The  D  Company  was  incorporated  with  power  to  construct  and  operate 
a    railroad    company.     Subsequently    the    legislature    authorized    the 
corporation  to  amend  its  charter,  authorizing  it  to  increase  its  capital 
stock,  purchase  boats  and  engage  in  water  transportation.     The  minority 
stockholders  ask  that  the  corporation  be  enjoined  from  accepting  the 
amendment.    What  decision  ? 

3.  Would  your  answer  be  the  same  in  the  foregoing  case  if  the  corporation 
had  been  authorized  to  do  the  things  complained  of  when  the  objecting 
stockholders  came  into  the  corporation  ? 

4.  The  majority  stockholders  voted  to  accept  the  following  amendments 
to  the  charter  of  the  corporation  which  were  not  authorized  when  S 
became  a  member  of  the  corporation:    (a)  changing  the  name  of  the 
corporation;   (b)  increasing  the  capital  stock;   (c)  decreasing  the  capital 
stock;    (d)  changing  the  location  of  the  business;    (e)  authorizing  the 
issuance  of  preferred  stock  for  the  purpose  of  raising  additional  capital 
with  which  to  carry  on  the  business.     S,  representing  the  minority 
stockholders,  asks  that  the  corporation  be  enjoined  from  accepting  the 
various  amendments.     What  decision  under  each  hypothesis  ? 

CENTRAL  RAILROAD  COMPANY  v.  COLLINS 

40  Georgia  Reports  582  (1869) 

This  was  a  bill  brought  by  the  stockholders  of  the  Central  Railroad 
Co.  and  the  Southwestern  Railroad  Co.,  seeking  to  enjoin  the  corpora- 
tions in  question  from  purchasing  stock  in  the  Atlantic  and  Gulf 
Railroad  Co.  The  trial  court  held  that  neither  corporation  had 
power  to  acquire  and  hold  stock  of  another  corporation  and  accord- 
ingly enjoined  the  corporations  from  making  the  proposed  purchase. 

McCAY,  J.  This  is  a  bill  filed  by  certain  stockholders  in  the 
Central  Railroad,  certain  stockholders  in  the  Southwestern  Railroad, 
and  certain  other  persons  who  claim  to  come  before  the  court  as 
citizens  of  the  state  of  Georgia,  and  as  such  to  be  interested  in  the 
relief  sought  by  the  bill. 

The  substance  of  the  charges  is,  that  the  Central  Railroad  Co. 
and  the  Southwestern  Railroad  Co.,  the  former  chartered  to  build 
and  maintain  a  railroad  from  Savannah  to  Macon,  and  the  lat- 
ter chartered  to  build  and  maintain  a  railroad  from  Macon  to  the 
Chattahoochee  River,  are  about  to  purchase  from  the  city  of  Savannah, 


474  LAW  AND  BUSINESS 

certain  stock,  including  twelve  thousand  three  hundred  and  eighty- 
three  shares  in  the  Atlantic  and  Gulf  Railroad  Co.,  a  company 
chartered  to  build  a  railroad  from  Savannah  to  Bainbridge,  with  the 
intent  and  purpose  on  the  part  of  these  two  companies  to  use  the 
stock  thus  purchased  to  affect  the  management  of  the  Atlantic  and 
Gulf  Road. 

The  answers  admit,  in  substance,  the  charges;  but  the  injunction 
is  sought  to  be  dissolved  on  the  ground  that  there  are  not  proper 
parties  to  the  bill,  and  on  the  further  ground,  that  said  Central 
Railroad  Co.,  and  Southwestern  Railroad  Co.,  have  a  right  under 
their  charters  to  make  such  a  purchase. 

There  are,  it  is  true,  some  other  points  made  in  the  demurrer  and 
motion  to  dissolve,  but  in  the  view  taken  of  the  case  by  the  majority 
of  the  court,  these  are  the  essential  questions. 

Upon  the  question  of  the  parties,  we  agree  that  the  citizens,  in 
their  character  as  such,  are  not  proper  parties  to  this  proceeding. 
The  state  as  one  of  the  stockholders  of  the  Atlantic  and  Gulf  Road  is 
a  proper  party;  but  the  simple  citizen,  who  has  no  other  interest, 
has  not,  as  it  seems  to  us,  any  rights  in  this  controversy.  This  is  a 
simple  attempt  to  enjoin  the  making  of  a  certain  contract,  a  mere 
private  suit,  in  which  no  one  has  a  right  to  be  heard,  that  is  not 
interested  in  the  decree.  The  wrong  done  the  public  by  the  alleged 
violation  of  the  charter  cannot  be  reached  in  this  proceeding  except 
so  far  as  it  affects  the  interests  of  those  whose  pecuniary  rights  are 
affected  by  the  proposed  contract. 

But  the  stockholders  in  the  Central  and  Southwestern  Railroad 
Cos.,  and  the  Atlantic  and  Gulf  Road  and  its  stockholders,  are  proper 
parties.  The  former  allege  that  this  contract  is  a  violation  of  their 
rights  under  the  several  charters,  and  the  latter  that  it  is  injurious 
to  its  rights  that  these  two  rival  roads  should  be  permitted  to  acquire 
so  controlling  an  interest  in  the  management  of  its  road.  As  this 
ground  of  the  motion  to  dissolve  is  in  the  nature  of  a  general  demurrer, 
to  be  good,  it  ought  to  show  there  are  no  proper  parties  to  the  bill. 

We  think  the  stockholders  of  the  several  roads  are  proper  parties, 
have  a  good  cause  of  complaint,  and  we  therefore  think  the  court  did 
right  to  overrule  the  motion  on  this  ground. 

We  do  not  think  the  profitableness  of  this  contract,  to  the  stock- 
holders of  the  Central  and  Southwestern  Railroad  stockholders,  has 
anything  to  do  with  the  matter.  These  stockholders  have  a  right, 
at  their  pleasure,  to  stand  on  their  contract.  If  the  charters  do  not 


MANAGEMENT  OF  THE  BUSINESS  UNIT  475 

give  to  these  companies  the  right  to  go  into  this  new  enterprise,  any 
one  stockholder  has  a  right  to  object.  He  is  not  to  be  forced  into  an 
enterprise  not  included  in  the  charter. 

That  it  will  be  to  his  interest  is  no  excuse;  that  is  for  hirrTto 
judge.  By  becoming  a  stockholder  he  has  contracted  that  a  majority 
of  the  stockholders  shall  manage  the  affairs  of  the  company  within 
its  proper  sphere  as  a  corporation,  but  no  further;  and  any  attempt 
to  use  the  funds,  or  pledge  the  credit  of  the  company  not  within  the 
legitimate  scope  of  the  charter  is  a  violation  of  the  contract  which 
the  stockholders  have  made  with  each  other,  and  of  the  rights — the 
contract  rights — of  any  stockholder  who  chooses  to  say,  "I  am  not 
willing."  It  may  be  that  it  will  be  to  his  advantage,  but  he  may 
not  think,  so,  and  he  has  a  legal  right  to  insist  upon  it  that  the  company 
shall  keep  within  the  powers  granted  to  it  by  the  charter :  i  Shelf ord 
on  Railways,  71;  i  My.  &  K.  162-63;  4  Y.  &  Coll.  618;  2  Dan. 
P.C.  521;  5  Hill,  386;  iSBarbour,  318;  43  N.  Hamp.,  525;  6  Angell 
and  Ames  on  Corporations  (4th  ed.),  and  cases  cited. 

I  am  therefore  of  the  opinion  that  the  judgment  of  the  court  below, 
refusing  to  dissolve  the  injunction,  is  right  and  ought  to  be  affirmed. 

QUESTIONS 

1 .  Upon  what  theory  did  the  court  in  this  case  grant  the  relief  prayed  for  ? 

2.  The  D  Company  was  organized  with  the  power  to  conduct  a  commercial 
and  savings  bank.    The  stockholders  voted  to  purchase  a  piece  of  land 
and  hold  it  for  speculative  purposes.    The  minority  stockholders  ask 
that  the  transaction  be  declared  void  and  canceled.    What  decision  ? 

3.  The  stockholders  of  the  corporation  vote  to  purchase  stock  in  the  X 
Company,  a  manufacturing  corporation.     The  minority  stockholders 
ask  that  the  corporation  be  enjoined  from  taking  the  proposed  action. 
What  decision  ? 

4.  The  corporation  in  the  foregoing  case  makes  the  purchase  with  the 
assent  of  all  stockholders.    Later  on  S  and  other  stockholders  repent 
and  bring  a  bill  asking  that  the  transaction  be  declared  void.     What 
decision  ? 

PLANT  v.  MACON  OIL  AND  ICE  COMPANY 

103  Georgia  Reports  666  (1898) 

LEWIS,  J.  This  was  a  petition  filed  by  R.  H.  Plant  and  W.  E. 
McCaw,  as  minority  stockholders  of  the  Macon  Oil  &  Ice  Co.,  a 
corporation,  against  that  company,  E.  N.  Jilks,  R.  J.  Taylor,  and  the 
Southern  Phosphate  Works,  for  an  injunction  to  prevent  the  corpora- 


476  LAW  AND  BUSINESS 

tion  from  making  or  carrying  into  effect  a  lease  of  its  property  and 
franchises,  which  petitioners  contended  was  ultra  vires. 

It  was  contended  by  counsel  for  the  plaintiffs  that  the  enumeration 
of  the  powers  granted  to  this  corporation  by  the  order  of  the  judge 
of  the  superior  court  excluded  the  exercise  of  all  powers  not  conferred 
by  its  charter;  that  the  order  of  incorporation  did  not  include  the 
power  to  lease  the  entire  plant  of  the  corporation — or,  in  other  words, 
to  go  out  of  business  as  a  manufacturing  concern.  The  general 
doctrine  that  the  powers  of  a  corporation,  whether  public  or  private, 
are  such  only  as  are  conferred  by  its  charter,  either  expressly  or  by 
fair  implication,  is  too  well  settled  to  require  discussion.  The  ques- 
tion, however,  whether  a  private  corporation,  unless  expressly 
restrained  by  statute,  has  an  unlimited  power  of  alienating  or  leasing 
its  property,  is  one  upon  which  the  authorities  do  not  apparently 
agree.  A  distinction  must  be  drawn  between  the  powers  of  a  public 
corporation  and  those  of  a  private  corporation  in  this  particular. 

Our  attention  has  been  called  to  the  cases  of  Thomas  v.  Railroad 
Co.,  101  U.S.  71,  25  L.  Ed.  950,  and  Pennsylvania  Railway  Co.  v. 
St.  Louis,  A.&T.H.  Railway  Co.,  118  U.S.  290,  6  Sup.  Ct.  1094,  30 
L.  Ed.  83,  in  which  that  court  ruled  that  a  railroad  company,  unless 
specially  authorized  by  its  charter,  or  aided  by  some  other  legislative 
action,  cannot,  by  lease  or  other  contract,  for  a  long  period  of  time, 
turn  over  to  another  company  it  appurtenances,  franchises,  and 
powers.  In  Reese,  Ultra  Vires,  section  137,  it  is  stated:  "This  rule 
is  based  upon  the  theory  that  public  or  quasi  public  corporations, 
which  possess  and  exercise  the  right  of  eminent  domain  or  its  equiva- 
lent, owe  duties  to  the  public  as  well  as  to  their  stockholders;  and  they 
cannot  sell  or  lease  their  corporate  powers  and  privileges  and  thereby 
disable  themselves  from  performing  their  public  duties,  without 
legislative  authority."  The  public,  however,  have  no  such  interest 
in  the  franchise  of  a  private  corporation;  and  that  rule  cannot,  with 
the  same  force,  be  applied  to  an  alienation  made  by  the  latter  class. 
Taylor,  Corporations,  section  132.  In  4  American  and  English 
Encyclopedia  of  Law,  page  219,  is  this  text:  "Corporations,  unless 
expressly  restrained  by  statute,  have  an  unlimited  power  of  alienation, 
like  that  of  an  individual;  and,  since  the  greater  power  includes  the 
less,  they  may  lease  property,  which  is  but  a  partial  or  temporary 
alienation."  In  Treadwell  v.  Manufacturing  Co.,  7  Gray  (Mass.) 
393,  66  Am.  Dec.  490,  this  right  of  alienation,  in  pursuance  of  the 
vote  of  a  majority  of  the  stockholders  against  the  protest  of  the 


MANAGEMENT  OF  THE  BUSINESS  UNIT  477 

minority  was  recognized.  On  page  404  of  that  case  the  court  said: 
"But  we  entertain  no  doubt  of  the  right  of  a  corporation,  established 
solely  for  trading  and  manufacturing  purposes,  by  a  vote  of  the 
majority  of  their  stockholders,  to  wind  up  their  affairs,  and  close  their 
business,  if,  in  the  exercise  of  a  sound  discretion,  they  deem  it  expedient 
so  to  do.  At  common  law,  the  right  of  corporations,  acting  by  a 
majority  of  their  stockholders,  to  sell  their  property,  is  absolute  and 
is  not  limited  as  to  objects,  circumstances,  or  quantity" — citing  a 
number  of  authorities. 

On  the  other  hand,  respectable  authority  can  be  found  denying 
this  right  of  alienation  to  a  private  corporation,  unless  expressly 
conferred  by  its  charter.  Among  the  cases  relied  on  by  the  plaintiff 
in  support  of  this  latter  view  is  that  of  Cass  v.  Steel  Co.  (C.C.)  9 
Fed.  640,  in  which  the  power  of  a  private  corporation  to  lease  its 
plant  was  denied  by  the  court.  It  appeared,  however,  in  that  case, 
that  the  board  of  directors  exercised  this  power  against  the  protest 
of  the  holders  of  a  majority  of  the  stock.  It  further  does  not  appear 
in  that  case  that  there  was  any  emergency  or  necessity  calling  for  a 
lease  of  its  property  by  the  company.  Reason,  as  well  as  authority, 
we  think,  will  sustain  the  position  that  neither  a  majority  of  stock- 
holders nor  the  directors  of  a  corporation  as  such,  without  special 
authority  for  that  purpose,  can  generally  do  an  act  which,  to  all 
intents  and  purposes,  terminates  the  corporation;  that  they  could 
not,  for  instance,  while  the  company  was  in  a  prosperous  condition, 
upon  their  own  mere  caprice,  sell  out  the  whole  source  of  their  emolu- 
ments, and  abandon  their  enterprise,  where  a  minority  desired  a 
prosecution  of  the  business.  Such  is  the  effect  of  rulings  in  the 
cases  of  Kean  v.  Johnson,  9  N.J.  Eq.  401;  Abbot  v.  Rubber  Co.,  33 
Barb.  (N.Y.)  578.  These  authorities,  however,  are  based  upon  the 
idea  of  an  abandonment  of  corporate  franchises  without  any  special 
necessity  requiring  such  a  course. 

Upon  a  cursory  glance  at  the  authorities  above  cited,  and  a 
number  of  others  we  have  investigated  upon  the  subject,  there  would 
seem  at  first  to  be  an  irreconcilable  conflict  upon  the  powers  and  rights 
of  a  majority  and  minority  of  stockholders  in  a  private  corporation 
touching  its  authority  to  alienate  or  lease  its  property  and  franchises. 
But  we  think  that  nearly,  if  not  quite,  all  of  the  authorities  upon  the 
subject  can  be  reconciled,  and  that  from  a  careful  consideration  of 
all  of  them  together  can  be  deduced  the  following  principles,  about 
which  there  seems  to  be  very  little,  if  any,  conflict. 


478  LAW  AND  BUSINESS 

First.  While  a  public  or  quasi  public  corporation  cannot,  without 
express  authority,  convey  or  lease  its  property  and  privileges,  as  a 
general  rule  this  can  be  done  by  a  private  corporation. 

Second.  But  a  private  corporation,  limited  as  to  duration, 
while  doing  a  successful  business,  cannot  sell  out,  and  abandon  its 
enterprise,  over  the  protest  of  a  minority  of  its  stockholders,  who 
have  the  right  to  insist  upon  a  continuance  of  its  business. 

Third.  While  a  minority  of  stockholders  have  the  right 
recognized  in  the  paragraph  just  above,  it  cannot  compel  a  majority 
to  continue  indefinitely  in  the  business  of  the  corporation,  provided 
a  majority,  in  arrangements  to  discontinue  the  business,  fully  protects 
the  interests  of  the  minority  by  payment  in  full  of  the  value  of  their 
shares,  should  it  be  demanded. 

Fourth.  A  minority  of  stockholders  cannot  compel  a  corporation, 
against  the  wishes  of  a  majority  of  the  owners  of  the  stock  therein, 
to  continue  a  business  that  would  be  unprofitable  or  ruinous  in  its 
results  to  the  interests  of  all  concerned.  Hence  it  has  been  often 
held  that  an  insolvent  corporation  has  the  right  to  make  an  assignment 
for  the  benefit  of  creditors,  which  right  does  not  depend  upon  the 
assent  of  all  its  stockholders. 

From  these  principles  it  follows  as  an  inevitable  conclusion  that 
a  private  corporation  has  the  right  temporarily  to  lease  or  rent  its 
property,  when  the  purpose  of  such  action  is  not  an  abandonment 
of  its  franchises,  but  to  meet  an  urgent  necessity  of  raising  a  fund, 
so  as  to  enable  it  afterward  "to  conduct  its  business  profitably,  and  to 
continue  the  enterprise  for  which  it  was  created.  Especially  is  this 
the  case  where  the  managing  officer  of  the  corporation  remains  in 
charge  of  the  property  during  this  temporary  rental.  The  emergency 
for  immediately  raising  money  to  meet  urgent  claims  against  the 
corporation  in  this  case  was  clearly  shown. 

The  trial  judge  was  authorized  in  drawing  the  conclusion  that  there 
was  no  purpose  on  the  part  of  the  corporation  of  abandoning  its  enter- 
prise or  franchises;  that,  on  the  contrary,  this  temporary  rental  of 
its  property  was  really  necessary  for  its  protection,  and  to  enable  the 
company  to  continue  its  business.  Its  manager  still  remains  the 
manager  of  the  property  during  the  tenancy.  The  rights  of  none 
interested  in  the  company  are  jeopardized  by  this  temporary  arrange- 
ment. To  place  it  in  the  power  of  a  minority  of  stockholders,  simply 
by  refusing  acquiescence,  to  defeat  a  scheme  looking  to  the  protection 
of  the  company's  property,  and  a  continuation  of  its  enterprise, 


MANAGEMENT  OF  THE  BUSINESS  UNIT  479 

might,  under  certain  circumstances,  clothe  them  with  the  authority 
of  wrecking  the  company,  and  defeating  the  very  objects  of  its 
corporate  existence. 

It  was  argued  by  counsel  for  plaintiffs  in  error  that  a  right  to 
rent  for  one  year  would  necessarily  imply,  at  the  expiration  of  the  lease, 
the  power  to  continue  the  rental  for  another  year,  and  so  on  indefi- 
nitely, and  thus  would  follow  the  power  of  entirely  and  permanently 
transferring  the  franchises  of  the  company  into  the  hands  of  another. 
The  reply  to  this  is,  "  Sufficient  unto  the  day  is  the  evil  thereof." 
Should  a  scheme  of  this  sort  in  the  future  be  attempted  without  any 
necessity  for  such  alienation,  the  plaintiffs  could  doubtless  then  have 
redress  of  their  grievances.  No  such  case  is  made  by  this  record, 
and  what  we  now  rule  is  that,  under  the  undisputed  facts  of  this  case, 
the  judge  properly  exercised  his  discretion  in  refusing  the  injunction. 

Judgment  affirmed. 

QUESTIONS 

1.  The  D  Company,  chartered  for  a  period  of  fifty  years,  is  a  prosperous, 
going  concern.     Nevertheless  the  stockholders  vote  to  go  out  of  business 
at  the  end  of  twenty-five  years.    The  minority  stockholders  ask  that 
the  corporation  be  enjoined  from  going  out  of  business  prematurely. 
What  decision  ? 

2.  Would  your  answer  in  the  foregoing  case  be  the  same  if  it  had  appeared 
that  the  corporation  was  chartered  for  an  indefinite  period  ? 

3.  The  corporation  has  had  many  financial  reverses  and  is  no  longer  able 
to  prosecute  its  business  successfully.    The  stockholders  vote  to  go  out 
of  business.    The  minority  seek  to  enjoin  the  corporation  from  so  doing. 
What  decision  ? 

4.  The  corporation  is  incorporated  for  the  purpose  of  constructing  and 
operating  a  railroad.     Because  of  financial  difficulties  the  stockholders 
vote  to  sell  all  the  property  and  franchises  of  the  corporation  and  go  out 
of  business.    Discuss  the  legality  of  the  action. 


FARMERS'  LOAN  AND  TRUST  COMPANY  v.  NEW  YORK 
AND  NORTHERN  RAILWAY  COMPANY 

150  New  York  Reports  410  (1896) 

Appeal  from  judgment  of  the  General  Term  of  the  Supreme 
Court  in  the  second  judicial  department,  entered  June  30,  1894, 
which  affirmed  a  judgment  in  favor  of  plaintiff  entered  upon  a  decision 
of  the  court  on  trial  at  Special  Term. 


480  LAW  AND  BUSINESS 

This  action  was  brought  to  foreclose  a  second  mortgage  upon 
the  property  of  the  New  York  &  Northern  Railway  Co.,  made  by  it 
and  given  to  the  plaintiff  as  trustee  to  secure  the  payment  of  second- 
mortgage  bonds  issued  by  that  company  amounting  to  $3,200,000. 

None  of  the  original  defendants  interposed  any  defense;  but  on 
October  5,  1893,  on  their  own  motion,  the  appellants  were  made 
parties  defendant  in  the  action,  and  served  an  answer. 

The  appellants  are  stockholders  of  the  New  York  &  Northern 
Railway  Co.,  representing  about  20,000  shares  of  preferred  and 
common  stock,  and  appear  in  this  action  on  their  own  behalf  and  also 
on  behalf  of  the  holders  of  the  other  shares  represented  by  them. 

As  conclusions  of  law  the  court  held  that  there  was  due  under 
said  mortgage  for  principal  and  interest  the  sum  of  $3,453,511.11,  and 
that  the  plaintiff  was  entitled  to  a  judgment  of  foreclosure  and  sale. 

MARTIN,  J.  That  the  New  York  Central  &  Hudson  River  Rail- 
road Co.  purchased  a  majority  of  the  second-mortgage  bonds  and  a 
majority  of  the  stock  of  the  New  York  &  Northern  Railway  Co. 
for  the  sole  purpose  of  obtaining  control  of  the  property  of  the  latter, 
is  clearly  established  by  the  proof  contained  in  the  record.  Indeed, 
such  was  the  avowed  purpose  of  its  purchase.  The  record  renders 
it  equally  clear  that  the  New  York  Central  &  Hudson  River  Railroad 
Co.  was  the  actual  and  beneficial  owner  of  such  bonds  and  stock  for 
several  months  before  the  commencement  of  this  action.  They  were 
retained  in  the  hands  of  Drexel,  Morgan  &  Co.,  not  as  owners  or 
holders  of  their  own  right,  but  as  agents  or  naked  trustees  for  the 
New  York  Central  &  Hudson  River  Railroad,  and  were  clearly 
subject  to  the  order  and  control  of  the  latter.  Moreover,  the  request 
that  Drexel,  Morgan  &  Co.  made  to  the  plaintiff  to  commence  this 
action  was  not  only  based  upon  the  bonds  owned  by  the  New  York 
Central  &  Hudson  River  Railroad  Co.  and  others  it  had  contracted 
to  purchase,  but  the  sole  purpose  of  that  request  was  to  procure  a 
foreclosure  and  thus  enable  the  New  York  Central  &  Hudson  River 
Railroad  Co.  to  acquire  control  of  the  property  and  franchises  of  the 
New  York  &  Northern  Railway  Co.  for  its  own  benefit,  as  set  forth 
in  the  circular  letter  sent  to  the  stockholders  of  the  New  York  Central 
&  Hudson  River  Railroad  Co.  The  president  of  the  latter  company 
himself  testified  that  that  was  the  object  and  purpose  which  induced 
the  sending  of  the  notice  requesting  the  commencement  of  this 
action.  The  notice  given  by  the  New  York  Central  &  Hudson  River 
Railroad  Co.  to  its  stockholders  states  the  fact  that  on  March  18, 


MANAGEMENT  OF  THE  BUSINESS  UNIT  481 

1893,  agreements  had  already  been  made  in  respect  to  the  purchase 
of  a  controlling  interest  in  the  New  York  &  Northern  Railway  Co., 
subject  to  the  approval  therein  asked  for.  The  letter  of  Drexel, 
Morgan  &  Co.  to  the  treasurer  of  the  New  York  Central  &  Hudson 
River  Railway  Co.,  dated  April  5,  1893,  shows  that  the  majority  of 
the  stock  and  bonds  mentioned  therein  was  held  by  them,  subject 
to  the  order  of  the  New  York  Central  &  Hudson  River  Railroad 
Co.,  and  that  they  had  received  the  note  of  that  company  in 
payment  therefor.  Thus,  it  is  obvious  that  this  action  was  pro- 
cured to  be  commenced  by  the  New  York  Central  &  Hudson 
River  Railroad  Co.,  while  it  owned  a  majority  of  the  stock  and 
bonds  of  the  New  York  &  Northern  Railway  Co.,  for  the  sole 
and  avowed  purpose  of  obtaining  control  of  its  property  and 
business,  regardless  of  the  rights  of  the  minority  stockholders  or 
the  owners  of  the  remainder  of  the  bonds.  The  appellants  contend 
that  the  New  York  Central  &  Hudson  River  Railroad  Co.,  as 
such  majority  stockholder,  also  acquired  the  entire  control  of  the 
affairs  of  the  New  York  &  Northern  Railway  Co.  through  its 
board  of  directors,  who  were  willing  to  serve  the  interest  of  those 
owning  a  majority  of  the  stock,  as  was  indicated  by  the  resignation 
of  three  of  the  directors,  the  appointment  of  others  in  their 
places,  who  were  in  the  employ  of  the  New  York  Central  &  Hudson 
River  Railroad  Co.,  to  discharge  the  duties  of  such  officers,  and 
compensated  for  their  services  by  the  New  York  Central  &  Hudson 
River  Railroad  Co.  While  the  proof  upon  that  question  was  not 
perhaps  conclusive,  yet,  the  circumstances  developed  by  the  evidence 
plainly  indicate  that  after  it  became  the  owner  of  a  majority  of  the 
stock  and  bonds,  the  New  York  Central  &  Hudson  River  Railroad  Co. 
dictated  and  governed  the  action  of  the  board  of  directors  and  con- 
trolled the  management  of  the  affairs  of  the  New  York  &  Northern 
Railway  Co. 

The  facts  already  referred  to  are  strong  proof  that  the  New  York 
Central  &  Hudson  River  Railroad  Co.  was  in  the  control  of  the 
affairs  of  the  New  York  &  Northern  Railway  Co.  It  is  hardly  to  be 
supposed  that  a  board  of  directors  who  was  not  under  the  control 
of  another  corporation  would  appoint  three  of  the  friends  of  the 
president  of  that  corporation  as  directors  of  the  company,  and  place 
the  officers  of  that  company  in  control  of  its  financial  affairs,  especially 
when  it  was  the  owner  of  competing  lines  of  railroad.  The  clear  and 
legitimate  inference  to  be  drawn  from  the  circumstances  proved  in 


482  LAW  AND  BUSINESS 

this  case  is  that  after  the  New  York  Central  &  Hudson  River  Railroad 
Co.  purchased  a  majority  of  the  stock  and  bonds  of  the  New  York 
&  Northern  Railway  Co.,  it  controlled  its  officers  and  directors  as  fully 
and  completely  as  though  they  had  been  elected  by  its  votes.  All 
the  facts  and  circumstances,  so  far  as  the  defendants  were  permitted 
to  prove  them,  tend  to  show  that  such  was  the  situation.  Indeed, 
it  is  a  matter  of  common  knowledge  that  where  the  ownership  of  a 
majority  of  the  stock  of  such  a  corporation  changes,  the  board  usually 
changes,  unless  its  members  are  already  in  harmony  with  the  policy 
of  the  purchasers. 

On  the  trial  the  appellants  sought  to  prove  that  after  the  New 
York  Central  &  Hudson  River  Railroad  Co.  became  the  owner  of  such 
stock  and  bonds,  and  while  its  officers  were  in  substantial  control  of 
the  New  York  &  Northern  Railway  Co.,  they  declined  to  accept 
traffic  from  other  roads  that  would  have  produced  a  fund  with  which 
to  pay  the  interest  due  on  the  bonds  in  question;  that  the  income  of 
the  road  which  should  have  been  employed  to  pay  such  interest  was 
used  for  other  and  improper  purposes;  and  that  such  action  caused 
the  inability  of  the  New  York  &  Northern  Railway  Co.  to  pay  the 
interest  and  thus  cure  its  default.  This  evidence  was  rejected  as 
immaterial,  and  the  appellants  duly  excepted. 

In  determining  the  correctness  of  the  rulings  made  by  the  trial 
court,  it  becomes  necessary  to  determine  incidentally  whether  a 
corporation,  purchasing  a  majority  of  the  stock  of  another  competing 
corporation,  may  thus  obtain  control  of  its  affairs,  cause  it  to  divert 
the  income  from  its  business,  or  to  refuse  business  which  would  enable 
it  to  pay  the  interest  for  which  it  was  in  default,  and  then  institute 
an  action  in  equity  to  enforce  its  obligations  for  the  purpose  of 
obtaining  control  of  its  property  at  less  than  its  value  to  the  injury 
of  the  minority  stockholders,  and  they  have  no  remedy.  Or,  in  other 
words,  whether  a  court  of  equity,  with  those  facts  established,  would 
lend  its  aid  to  such  a  stockholder  by  enforcing  the  mortgage  and 
decreeing  a  foreclosure  and  sale  of  the  mortgaged  premises,  at  its 
request,  in  its  behalf,  and  to  accomplish  such  a  purpose.  If  it  would, 
then  the  rulings  of  the  trial  court  were  proper;  if  not,  then  the  appel- 
lants were  entitled  to  prove  those  facts,  and  it  was  error  to  reject 
the  evidence. 

In  Gamble  v.  Q.  C.  W.  Co.  (123  N.Y.  91),  in  discussing  a  similar 
question,  JUDGE  PECKHAM,  in  effect,  said  that,  although  it  is  not  every 
question  of  mere  administration  or  of  policy  upon  which  there  might 


MANAGEMENT  OF  THE  BUSINESS  UNIT  483 

be  a  difference  of  opinion  that  would  justify  the  minority  in  coming 
into  a  court  of  equity  to  obtain  relief,  yet,  where  the  action  of  a 
majority  of  the  stockholders  of  a  corporation  is  fraudulent  or  oppres- 
sive to  the  minority  shareholders,  an  action  may  be  maintained  by 
the  latter,  where  the  contemplated  action  of  the  majority  is  so  far 
opposed  to  the  interests  of  the  corporation  as  to  lead  to  a  clear  infer- 
ence that  such  action  is  with  an  intent  to  serve  some  outside  purpose, 
regardless  of  the  consequences  to  the  company  and  inconsistent 
with  its  interests. 

In  Meyer  v.  Staten  Island  Railway  Co.  (7  N.Y.  St.  Repr.  245)  it 
was  held  that  a  majority  of  the  stockholders  of  a  corporation  would 
not  be  permitted  to  sanction  a  transaction  which  is  the  outcome  of  a 
scheme,  dishonest  or  fraudulent  in  its  inception,  and  that  the  minority 
stockholders  have  rights  which  under  such  circumstances  must  be  recog- 
nized; that  the  majority  may  legally  control  the  company's  business, 
but  in  assuming  such  control  they  take  upon  themselves  the  correla- 
tive duty  of  diligence  and  good  faith,  and  that  they  cannot  manipulate 
the  company's  business  in  their  own  interests  to  the  injury  of  the 
minority  stockholders. 

In  Ervin  v.  Oregon  Railway  6°  Nav.  Co.  (27  Fed.  R.  630)  it  was 
held  that  when  a  number  of  stockholders  combine  to  constitute 
themselves  a  majority,  to  control  the  corporation  as  they  see  fit, 
they  become,  for  all  practical  purposes,  the  corporation  itself,  and 
assume  the  trust  relation  of  the  corporation  toward  its  stockholders, 
and,  if  they  seek  to  make  profit  out  of  it  at  the  expense  of  those  whose 
rights  are  the  same  as  their  own,  they  are  unfaithful  to  the  relation 
they  have  assumed,  and  guilty,  at  least,  of  constructive  fraud  which 
a  court  of  equity  will  remedy. 

In  Wright  v.  Oromlle  M.  Co.  (40  Cal.  20)  it  was  in  substance  held 
that  in  dealing  with  the  relations  between  a  corporation  and  its  officers 
on  one  hand  and  the  stockholders  upon  the  other,  in  the  management 
of  the  corporate  affairs,  courts  of  equity  will  look  beyond  the  mere 
observance  of  the  forms  of  law,  and  inquire  if  the  authority  has  been 
in  good  faith  exercised  to  promote  the  interests  of  the  stockholders; 
and  that  a  court  of  equity  will,  at  the  instance  of  a  stockholder,  control 
the  corporation  and  its  officers,  and  restrain  them  from  doing  acts  even 
within  the  scope  of  the  corporate  authority,  if  such  acts  would  amount 
to  a  breach  of  the  trust  upon  which  the  authority  had  been  conferred. 

In  Meeker  v.  Winthrop  Iron  Co.  (17  Fed.  R.  48)  it  was  held  that 
a  majority  of  the  holders  of  the  capital  stock  of  a  corporation  could 


484  LAW  AND  BUSINESS 

not,  by  their  votes  in  a  stockholders'  meeting,  lawfully  authorize 
its  officers  to  lease  its  property  to  themselves  or  to  another  corporation 
formed  for  the  purpose  and  exclusively  owned  by  them,  unless  such 
lease  was  made  in  good  faith,  and  supported  by  an  adequate  consider- 
ation; and  that  in  a  suit,  properly  prosecuted,  to  set  aside  such  a 
contract,  the  burden  of  proof  of  showing  fairness  and  adequacy  is  upon 
the  party  or  parties  claiming  thereunder. 

"The  law  requires  of  the  majority  of  the  stockholders  the  utmost 
good  faith  in  their  control  and  management  of  the  corporation  as 
regards  the  minority,  and  in  this  respect  the  majority  stand  in  much 
the  same  attitude  towards  the  minority  that  the  directors  sustain 
towards  all  the  stockholders.  Thus,  there  the  majority  are  interested 
in  another  corporation,  and  the  two  corporations  have  contracts 
between  them,  it  is  fraudulent  for  that  majority  to  manage  the  affairs 
of  the  first  corporation  for  the  benefit  of  the  second.  A  court  of 
equity  will  intervene  and  protect  the  minority  upon  an  application 
by  the  latter."  (2  Cook  on  Stock  and  Stockholders  [$d  ed.],  sec.  662, 
p.  945.)  The  same  principle  is  stated  in  i  Morawetz  on  Private 
Corporations  (2d  ed.,  sec.  529);  i  Beach  on  Private  Corporations 
(sec.  70);  2  Bigelow  on  Frauds  (sec.  645),  and  Beach  on  Mod.  Eq. 
Juris,  (sees.  132,  686). 

While  the  question  in  some  of  the  cases  cited  arose  between 
stockholders  and  the  directors  and  officers  of  a  company  who  as  such 
held  a  position  of  trust  as  to  the  former,  still,  where,  as  in  this  case, 
a  majority  of  the  stock  is  owned  by  a  corporation  or  a  combination 
of  individuals,  and  it  assumes  the  control  of  another  company's 
business  and  affairs  through  its  control  of  the  officers  and  directors 
of  the  corporation,  it  would  seem  that  for  all  practical  purposes  it 
becomes  the  corporation  of  which  it  holds  a  majority  of  stock,  and 
assumes  the  same  trust  relation  toward  the  minority  stockholders 
that  a  corporation  itself  usually  bears  to  its  stockholders,  and,  there- 
fore, under  such  circumstances,  the  rule  stated  in  the  Sage  Case 
and  in  other  similar  cases  applies  to  majority  stockholders  who  control 
the  affairs  of  the  company,  as  well  as  to  its  directors  or  officers. 

It  is  a  controlling  maxim  that  a  court  of  equity  will  not  aid 
parties  in  the  perpetration  or  consummation  of  a  fraud,  nor  give  any 
assistance  whereby  either  of  the  parties  connected  with  the  betrayal 
of  a  trust  can  derive  any  advantage  therefrom.  (Farley  v.  St.  Paul, 
Minneapolis  &  Manitoba  Railway  Co.,  4  McCrary,  138.)  "It  is  a 
sound  principle,  that  he  who  prevents  a  thing  being  done  shall  not 


MANAGEMENT  OF  THE  BUSINESS  UNIT  485 

avail  himself  of  the  non-performance  he  has  occasioned."  (Fleming 
v.  Gilbert,  3  Johns.  528,  531;  United  States  v.  Peck,  102  U.S.  64; 
Dolan  v.  Rogers,  149  N.Y.  491.) 

The  principle  of  these  authorities  renders  it  quite  obvious  that  a 
corporation,  purchasing  a  majority  of  the  stock  of  another  competing 
one,  cannot  obtain  control  of  its  affairs,  divert  the  income  of  its 
business,  refuse  business  which  would  enable  the  defaulting  company 
to  pay  its  interest,  and  then  institute  an  action  in  equity  to  enforce 
its  obligations,  for  the  avowed  purpose  of  obtaining  entire  control  of 
its  property  to  the  injury  of  the  minority  stockholders.  Such  a  course 
of  action  is  clearly  opposed  to  the  true  interests  of  the  corporation 
itself,  plainly  discloses  that  one  thus  acting  was  not  influenced  by  any 
honest  desire  to  secure  such  interests,  but  that  its  action  was  to 
serve  an  outside  purpose,  regardless  of  consequences  to  the  debtor 
company,  and  in  a  manner  inconsistent  with  its  interest  and  the 
interest  of  its  minority  stockholders. 

Hence,  we  are  of  the  opinion  that  the  court  erred  in  rejecting  as 
immaterial  evidence  offered  by  the  appellants  to  show  that,  after  the 
New  York  Central  &  Hudson  River  Railroad  Co.  became  the  owner 
of  a  majority  of  the  stock  and  bonds  of  the  New  York  &  Northern 
Railway  Co.,  and  while  its  officers  were  in  control  of  the  latter  corpora- 
tion and  its  affairs,  it  declined  to  accept  traffic  from  other  roads 
which  would  have  produced  a  fund  with  which  to  pay  the  interest 
that  was  due;  that  the  income  of  the  road,  which  should  have  been 
employed  to  pay  such  interest,  was  used  for  other  and  improper 
purposes,  and  that  such  action  upon  the  part  of  the  majority  stock- 
holders occasioned  the  inability  of  the  company  to  pay  the  interest 
and  cure  the  default.  To  the  rejection  of  this  evidence  the  defendants 
excepted.  We  think  many  of  these  rulings  were  erroneous,  and  that 
the  appellants  had  the  right  to  make  the  proof  offered,  so  far  as  it 
related  to  the  transaction  of  the  business  of  the  New  York  &  Northern 
Railway  Co.,  during  the  time  the  New  York  Central  &  Hudson  River 
Railroad  Co.  owned  a  majority  of  its  stock  and  controlled  its  affairs, 
and  for  the  error  in  those  rulings  the  judgment  should  be  reversed. 

QUESTIONS 

i.  D  and  others,  stockholders  in  the  Y  Company,  acquire  the  majority 
of  the  stock  of  the  X  Company,  a  corporation  in  competition  with  the 
Y  Company.  They  immediately  vote  to  dispose  of  all  the  property  of 
the  X  Company.  What  are  the  rights  of  the  minority  stockholders  of 
the  X  Company  ? 


486  LAW  AND  BUSINESS 

2.  In  the  foregoing  case,  D  and  others  vote  to  discontinue  the  business 
of  the  X  Company  because  of  its  financial  condition.     The  minority 
stockholders  of  the  X  Company  seek  to  prevent  the  proposed  action. 
What  decision  ? 

3.  D  and  others  hold  the  controlling  interest  in  the  B  Corporation.     The 
directors  with  the  assent  of  the  majority  of  the  stockholders  vote  to  sell 
a  tract  of  land  owned  by  the  corporation  to  D  at  a  great  sacrifice.     What 
are  the  rights  of  the  minority  stockholders  of  the  B  Corporation  ? 

4.  D  offered  to  sell  a  piece  of  property  to  the  corporation  at  an  exorbitant 
price.    The  directors  accepted  the  offer.    Later,  the  majority  stock- 
holders ratified  the  action  of  the  directors.    What  are  the  rights,  if  any, 
of  the  minority  stockholders  ? 

SCHWAB  v.  POTTER  COMPANY 
194  New  York  Reports  409  (1909) 

VANN,  J.  The  main  question  presented  by  this  appeal  is  whether 
the  proposed  transaction  is  beyond  the  powers  of  the  defendant 
corporation,  for  it  is  well  established  that  in  the  absence  of  fraud  or 
bad  faith  courts  have  nothing  to  do  with  the  internal  management 
of  business  corporations,  provided  they  keep  within  their  corporate 
powers.  (Gamble  v.  Queens  County  Water  Co.,  123  N.Y.  91;  Flynn  v. 
Brooklyn  City  Railroad  Co.,  158  N.Y.  493,  507.)  Thus  we  said  in  the 
case  last  cited: 

Whatever  may  lawfully  be  done  by  the  directors  or  the  stockholders, 
acting  through  majorities  prescribed  by  law,  must  of  necessity  be  submitted 
to  by  the  minority,  for  corporations  can  be  conducted  upon-  no  other  basis. 
All  the  questions  within  the  scope  of  the  corporate  powers  which  relate  to 
the  policy  of  the  administration,  to  the  expediency  of  proposed  measures, 
or  to  the  consideration  of  contracts,  provided  it  is  not  so  grossly  inadequate 
as  to  be  evidence  of  fraud,  are  beyond  the  province  of  the  courts.  The 
minority  directors  or  stockholders  cannot  come  into  court  upon  allegations 
of  a  want  of  judgment  or  lack  of  efficiency  on  the  part  of  the  majority  and 
change  the  course  of  administration.  Corporate  elections  furnish  the  only 
remedy  for  internal  dissensions,  as  the  majority  must  rule  so  long  as  it  keeps 
within  the  powers  conferred  by  the  charter. 

The  complaint  does  not  disclose  the  purposes  for  which  the 
defendant  corporation  was  organized,  nor  set  forth  its  corporate 
powers  except  as  it  may  be  inferred  from  the  statement  of  assets  and 
liabilities  that  it  carries  on  a  manufacturing  business,  while  the  new 
corporation  apparently  was  to  be  a  " realty"  company.  If,  however, 


MANAGEMENT  OF  THE  BUSINESS  UNIT  487 

no  corporation  in  this  state  is  authorized  to  organize  another,  divide 
its  assets  with  it  and  take  in  exchange  its  entire  capital  stock,  then 
the  proposed  plan  is  ultra  vires  and  the  execution  thereof  may  be 
restrained  by  an  injunction. 

Corporations  are  created  by  statute  and  have  no  powers  except 
those  conferred  by  statute,  directly  or  indirectly.  (Laws,  1892,  chap. 
687;  Laws,  1895,  chap.  672,  sec.  10.)  There  is  no  statute  in  this 
state  which  directly  authorizes  one  corporation  to  organize  another 
and,  as  we  think,  such  action  is  not  indirectly  authorized  by  any 
reasonable  inference  from  the  most  extensive  powers  committed  to 
any  class  of  corporations  known  to  our  law.  Corporations  are 
organized  by  natural  persons,  acting  under  the  direction  of  a  statute, 
and  they  only  can  become  corporators,  directors,  or  officers.  "Arti- 
ficial persons,"  without  brain  or  body,  existing  only  on  paper  through 
legislative  command  and  incapable  of  thought  or  action  except  through 
natural  persons,  cannot  create  other  "artificial  persons,"  and  those, 
others  still,  until  the  line  is  so  extended  and  the  capital  stock  so 
duplicated  and  reduplicated,  as  to  result  in  confusion  and  fraud.  If, 
in  the  case  before  us,  the  proposed  plan  is  carried  into  effect,  the 
old  corporation  will  be  the  only  stockholder  of  the  new  corporation 
when  it  comes  into  being,  which  is  the  time  to  test  its  legality,  and  the 
entire  capital  stock  of  the  latter  will  have  been  taken  from  the  assets 
of  the  former.  After  the  old  corporation  has  thus  split  itself  into 
two  corporations,  both  together  will  have  only  the  capital  that  the 
old  corporation  had  before.  Not  a  dollar  of  new  capital  will  have 
been  contributed  either  in  money  or  property  and  only  when  the  old 
corporation  sells  to  subscribers  or  outsiders — and  it  is  not  alleged  that 
it  will  be  able  to  sell  to  either — all  or  a  part  of  the  shares  of  stock, 
issued  to  it  by  the  new,  can  any  money  come  from  the  transaction. 
This  shows  that  the  purpose  of  the  strange  action  proposed  is  to 
increase  the  capital  stock  of  the  old  company  without  complying  with 
the  provisions  of  the  statute  governing  the  subject.  The  increase  is 
to  be  obtained  by  what  is  in  effect  a  forced  assessment  upon  the  fully 
paid  and  non-assessable  shares  of  the  stockholders,  for  unless  they 
take  new  stock  they  lose  a  material  part  of  their  investment,  although 
something  they  do  not  want  is  given  in  exchange.  Thus  they  are 
virtually  compelled  by  an  unlawful  scheme  to  enter  into  new  con- 
tractual relations  with  strange  parties.  (Mason  v.  Pewabic  Mining 
Co.,  133  U.S.  50.)  This  would  be  an  obvious  evasion  of  the 
law  which  the  courts  will  restrain  when  applied  to  by  the  proper 


488  LAW  AND  BUSINESS 

party.    As  was  well  said  by  the  presiding  justice  below  in  a  useful 
opinion : 

But  it  is  evident  from  the  allegations  of  this  complaint  and  from  the 
inferences  that  fairly  may  be  drawn  from  such  allegations  that  what  was  in 
the  contemplation  of  the  directors  and  majority  stockholders  of  the  defendant 
corporation  was  not  to  have  that  corporation  make  an  actual  sale  of  the 
real  estate  to  another  corporation  and  receive  shares  of  stock  as  the  consider- 
ation therefor,  but  to  resort  to  a  device  by  which  to  increase  its  capital  by 
dismembering  itself  and  organizing  another  corporation  of  which  it  should 
be  the  only  stockholder,  and  thus  evade  the  provisions  of  the  statute  relating 
to  the  increase  of  the  capital  stock  of  a  corporation.  The  defendant 
corporation,  by  the  resolution,  is  authorized  and  directed  to  create  a  new 
corporation  at  the  expense  of  the  old  one.  What  it  is  to  do,  therefore, 
is  to  be  a  corporate  act  done  in  its  capacity  as  a  corporation.  Instead  of 
increasing  its  capital  stock  in  the  manner  provided  by  law,  it  is  to  separate 
its  assets,  deliver  one  portion  of  them  to  its  own  creature,  capitalize  that 
portion  of  stock  issued  by  its  creature;  and  there  that  transaction  really 
ends.  Affording  an  opportunity  to  the  stockholders  of  the  old  corporation 
to  subscribe  to  the  stock  of  the  new  one  is  merely  an  offer  to  them  to  buy 
from  the  old  corporation  this  new  stock  after  it  comes  into  the  possession 
of  the  old  corporation.  [129  App.  Div.  36,  40.] 

Corporations  cannot  resort  to  ingenious  and  original  methods  of 
action  with  the  freedom  of  individuals,  for  they  are  confined  to  those 
expressly  authorized  by  statute  and  such  as  are  incidental  thereto 
and  necessary  to  carry  them  into  effect.  If  the  purpose  of  the  old 
corporation  was  to  increase  its  capital  stock,  the  object  was  lawful 
but  the  method  was  unlawful  and  this  is  true  if  its  object  was  merely 
to  sell  its  real  estate.  Whatever  the  purpose  may  have  been,  the 
plan  was  unlawful,  because  it  would  have  caused  an  increase  of  the 
capital  stock  of  the  corporation  by  an  unauthorized  method.  While 
the  majority  stockholders,  or  the  directors,  acting  as  individuals, 
could  have  organized  the  new  corporation,  they  could  not  use  the  real 
estate  of  the  old  corporation  to  provide  it  with  capital  stock,  for  what 
was  not  their  property.  According  to  the  scheme  adopted,  however, 
the  majority  stockholders  were  not  to  effect  the  new  organization, 
but  the  board  of  directors,  acting  as  such,  were  ''authorized,  empow- 
ered and  directed  to  cause"  the  new  corporation  to  be  organized,  "at 
the  expense  of  the  old"  and  by  a  division  of  its  assets.  This  was 
beyond  the  powers  of  the  corporation,  its  stockholders,  and  directors. 
Whatever  is  done  by  a  corporation  without  authority  is  done  in 
violation  of  law,  for  all  action,  not  authorized  directly  or  indirectly, 


MANAGEMENT  OF  THE  BUSINESS  UNIT  489 

is  prohibited.  (General  Corporation  Law  [L.  1890,  chap.  563,  as 
amended],  sec.  10.)  Any  minority  stockholder  who  opposed  the 
scheme  was  entitled  to  an  injunction,  even  without  alleging  actual 
injury,  or  the  certainty  thereof  in  the  future,  for  he  is  entitled  to  stand 
on  his  legal  rights  and  may  refuse  to  accept  " something  better"  in 
exchange.  His  legal  right  was  to  continue  a  member  of  one  corpora- 
tion and  not  to  be  forced  into  the  membership  of  a  second  corporation, 
all  the  capital  of  which  was  to  be  taken  from  the  assets  of  the  former. 
The  plaintiff  is  now  the  equitable  owner  of  one-thirtieth  of  the  assets 
of  the  defendant  company.  By  the  proposed  plan  he  will  be  deprived 
of  his  one-thirtieth  interest  in  the  real  estate  and  either  lose  it  alto- 
gether or  be  forced  to  buy  stock  in  another  company,  organized 
without  the  sanction  of  law,  in  order  to  save  himself.  That  would  in 
effect  be  a  forced  sale  by  the  corporation  to  its  own  stockholders  and 
would  result  in  an  increase  of  the  capital  stock  by  an  unauthorized 
method. 

If  we  have  reasoned  correctly  thus  far,  it  is  obvious  that  the 
allegations  in  the  second  and  third  divisions  of  the  answer  constitute 
no  defense.  Even  if  a  sale  of  the  real  estate  was  "necessary,"  as 
alleged  in  the  second  defense,  that  did  not  permit  the  organization  of  a 
corporation  without  authority,  nor  justify  the  spoliation  of  the  defend- 
ant company  in  order  to  give  it  capital;  and,  if  the  agreement  to 
sell  was  " ratified"  by  two-thirds  of  the  stockholders,  as  alleged  in 
the  third  defense,  that  did  not  validate  the  method  of  selling,  as  to  any 
stockholder  who  objected.  Ratification  may  confirm  a  voidable  act, 
but  not  one  utterly  void. 

We  think  that  the  complaint  sets  forth  a  good  cause  of  action 
and  that  the  answer,  so  far  as  before  us,  sets  forth  no  defense. 

QUESTIONS 

1.  The  D  Corporation  has  a  cause  of  action  against  X  on  which  the  directors, 
with  the  acquiescence  of  the  majority  stockholders,  refuse   to  bring 
action.    What  remedy,  if  any,  have  the  minority  stockholders  under 
the  circumstances  ? 

2.  The  city  of  X  is  threatening  to  impose  an  illegal  corporation  tax  on  the 
corporation.    The  directors,   with   the  acquiescence  of  the  majority 
stockholders,  refuse  to  take  any  action  to  oppose  the  proceedings  of  the 
city.    What  recourse,  if  any,  do  the  minority  stockholders  have  ? 

3.  The  directors  of  the  corporation,  with  the  acquiescence  of  the  majority 
stockholders,  are  grossly  mismanaging  the  corporation.     What  recourse, 
if  any,  do  the  minority  stockholders  have  ? 


4QO  LAW  AND  BUSINESS 

4.  When  the  minority  stockholders  wish  to  prevent  the  oppressive  or 
fraudulent  misconduct  of  the  majority,  how  do  they  proceed  ?  In  what 
court  do  they  institute  their  proceedings?  Must  all  minority  stock- 
holders be  joined  in  the  proceedings  ?  To  what  kind  of  relief  are  they 
entitled  ? 

DUNPHY  v.  TRAVELERS'  NEWSPAPER  ASSOCIATION 

146  Massachusetts  Reports  495  (1888) 

KNOWLTON,  J.  The  plaintiff  brings  this  bill  in  equity,  filed  on 
December  18,  1886,  as  a  stockholder  in  the  defendant  corporation,  in 
.behalf  of  himself  and  such  other  stockholders  as  may  join  him  therein, 
alleging  that  Roland  Worthington,  one  of  the  defendants,  is  the 
president  and  treasurer  of  said  corporation,  and  is,  and  for  a  long  time 
has  been,  the  owner  or  controller  of  a  majority  of  the  shares  of  its 
capital  stock,  and,  by  means  of  his  ownership  and  control,  has  chosen 
such  persons  to  be  directors  as  he  has  seen  fit,  and  has  improperly  used 
and  invested  large  sums  of  the  money  of  the  corporation  in  certain 
specified  ways,  and  has  kept  other  large  sums  of  its  money  on  hand, 
drawing  no  interest;  and  has  improperly  received  large  amounts  as  his 
salary  as  president  of  the  corporation,  and  as  rent  for  a  building  owned 
by  him  and  occupied  by  it;  and  has  prevented  the  making  of  dividends 
upon  the  capital  stock,  and  has  otherwise  improperly  managed  the 
affairs  of  said  corporation,  to  the  great  damage  of  the  plaintiff  and 
other  stockholders.  The  plaintiff  prays  that  said  Worthington  may 
be  directed  to  render  accounts  of  all  his  dealings  with  the  assets  of  the 
corporation;  and  to  refund  all  moneys  improperly  received  or  paid 
out  by  him,  and  to  pay  to  certain  stockholders  such  sums  of  money  as 
shall  equalize  among  all  the  stockholders  certain  distributions  alleged 
to  have  been  irregularly  made  among  some  of  them;  and  to  file  a 
correct  statement  in  detail  of  all  the  present  assets  and  liabilities  of  the 
corporation,  and  hereafter  annually  to  render  accounts  of  his  dealings 
with  it  as  treasurer,  so  long  as  he  holds  that  office.  He  also  prays 
that  all  funds  of  the  corporation  on  hand  in  excess  of  $5,000  be  ordered 
distributed  among  the  stockholders  at  once,  and  that  the  corporation 
be  required  hereafter  to  declare  dividends  as  often  as  the  cash  on 
hand  shall  equal  5  per  cent  of  the  amount  of  its  capital  stock  and  for 
general  relief. 

Courts  of  equity  are  swift  to  protect  helpless  minorities  of  stock- 
holders of  corporations  from  the  oppression  and  fraud  of  majorities. 
But  the  legal  relations  into  which  the  members  of  a  corporation 


MANAGEMENT  OF  THE  BUSINESS  UNIT  491 

enter  require  them  to  seek  redress  of  supposed  wrongs  done  them  as 
stockholders  from  its  officers,  and  from  the  corporation  itself,  before 
applying  elsewhere.  Misconduct  in  dealing  with  a  corporation,  or 
in  the  management  of  its  affairs,  can  affect  its  members  only  through 
the  corporation  itself.  The  wrong,  in  such  a  case,  is  done  primarily 
to  the  corporation.  It  is  the  duty  of  its  directors,  or  other  managing 
officers,  to  protect  it  from  those  who  would  do  it  injustice,  and  to 
seek  compensation  for  any  injury  which  it  receives.  Stockholders  in  a 
corporation  impliedly  agree  when  they  join  it,  to  act,  in  the  corporate 
business,  through  officers  chosen  to  represent  them,  or  by  vote  at 
meetings  of  the  members  regularly  called;  and  so,  if  they  deem  them- 
selves aggrieved  as  shareholders  by  the  dealings  of  others  with  it, 
or  by  the  acts  of  its  managers,  they  are  bound  to  seek  their  remedy 
through  corporate  channels:  First,  by  application  to  the  officers  in 
charge;  and,  failing  there,  secondly,  to  the  corporation  itself,  at  a 
meeting  of  its  members.  If  they  can  obtain  justice  at  the  hand  of 
neither,  the  courts  are  open,  for  it  would  be  contrary  to  the  funda- 
mental principles  of  corporate  organization  to  hold  that  a  single 
shareholder  can  at  any  time  launch  the  corporation  into  litigation  to 
obtain  from  another  what  he  deems  to  be  due  to  it,  or  to  prevent 
methods  of  management  which  he  thinks  unwise.  Intelligent  and 
honest  men  differ  upon  questions  of  business  policy.  It  is  not  always 
best  to  insist  upon  all  one's  rights;  and  a  corporation,  acting  by  its 
directors  or  by  vote  of  its  members,  may  properly  refuse  to  bring  a 
suit  which  one  of  its  stockholders  believes  should  be  prosecuted.  In 
such  a  case  the  will  of  the  majority  must  control.  It  is  only  when  the 
action  or  a  corporation  in  refusing  to  proceed  at  the  request  of  a 
stockholder  is  fraudulent  as  against  him,  or  in  disregard  of  his  rights, 
that  he  can  maintain  a  suit  in  his  own  name  in  the  corporate  right. 
The  court  cannot  interfere  with  the  management  of  corporation  in 
matters  which  are  properly  within  their  discretion,  so  long  as  their 
discretion  is  fairly  exercised;  and  it  is  always  assumed,  until  the 
contrary  appears,  that  they  and  their  officers  obey  the  law,  and  act 
in  good  faith  toward  all  their  members.  Even  when  their  acts  are 
ultra  vires,  or  otherwise  illegal,  a  complaining  member  must  first 
seek  his  remedy  within  the  corporation.  The  only  exception  to  the 
rule  that  a  stockholder  must  apply  to  the  directors,  and  also,  if  need 
be,  to  the  corporation  for  redress  of  a  wrong  done  it,  before  he  can 
sue  in  a  court  of  equity  for  himself,  and  in  behalf  of  other  stockholders, 
is  when  it  appears  that  such  application  would  be  unavailing  to  pro- 


492  LAW  AND  BUSINESS 

tect  his  rights.  Brewer  v.  Theater,  104  Mass.  378;  Allen,  v.  Wilson 
(C.C.)  28  Fed.  677;  Hawes  v.  Oakland,  104  U.S.  450,  26  L.  Ed.  827; 
Detroit  v.  Dean,  106  U.S.  537;  i  Sup.  Ct.  500,  27  L.  Ed.  30;  Dimpfel  v. 
Railway  Co.  no  U.S.  209,  3  Sup.  Ct.  573,  28  L.  Ed.  121;  7*055  v. 
Harbottle,  2  Hare,  461.  That  may  happen  when  the  directors  them- 
selves are  the  wrongdoers,  or  are  in  fraudulent  combination  with 
them,  or  when  the  corporation  is  controlled  by  them,  or  when  it  is 
necessary  that  action  should  be  taken  too  speedily  to  leave  time  for  a 
corporate  meeting  of  the  stockholders. 

In  the  case  at  bar  there  is  an  averment  that  Roland  Worthington, 
the  alleged  wrongdoer,  has  for  a  long  time  controlled  a  majority  of  the 
stock,  and  has  elected  such  persons  directors  as  he  chose.  That  states 
a  sufficient  reason  for  not  applying  to  the  corporation  at  a  meeting  of 
its  members  for  action  to  redress  its  wrongs.  But  it  is  not  alleged 
that  the  plaintiff  ever  attempted  to  move  the  directors  in  the  interest 
of  the  corporation,  in  the  matters  complained  of,  or  that  any  good 
reason  existed  for  his  failure  so  to  do.  It  does  not  even  appear  who, 
or  how  many,  the  directors  are.  It  is  said  that  the  defendants  Roland 
Worthington  and  Roland  Worthington,  the  younger,  are  directors, 
but  no  others  are  named.  The  law  provides  that  there  shall  be  at 
least  three,  and  it  is  to  be  presumed  that  there  are  others  besides 
these  defendants.  There  is  no  allegation  of  fraud,  or  of  wrongful 
combination  with  Roland  Worthington,  or  of  other  misconduct  on 
the  part  of  any  of  them;  and  it  cannot  be  presumed,  in  the  absence 
of  such  averments,  that  they  would  refuse  to  do  their  duty  if  their 
attention  were  called  to  it. 

In  Brewer  v.  Theater,  ubi  supra — a  much  stronger  case  for  the 
plaintiff  than  this — an  allegation  was  in  these  words:  "A  majority 
of  the  present  board  of  directors  of  said  defendant  corporation  are 
acting  in  the  interest  of,  and  are  under  the  control  of,  said  Tompkins 
and  Thayer,"  the  authors  of  the  alleged  fraud,  and  it  was  held  that 
this  allegation  did  not  set  forth  a  sufficient  reason  for  bringing  a  suit 
without  first  requesting  the  directors  to  do  it. 

For  the  reasons  which  we  have  stated  the  demurrer  must  be 
sustained. 

QUESTIONS 

i.  In  what  court  was  the  action  in  the  principal  case  brought?  What 
was  the  nature  of  the  proceedings  ?  If  plaintiff  had  made  out  his  case, 
to  what  relief  would  he  have  been  entitled  ? 


MANAGEMENT  OF  THE  BUSINESS  UNIT  493 

2.  What  was  the  wrong  complained  of  in  the  principal  case?    Was  it  a 
wrong  against  the  plaintiff  as  a  stockholder  or  a  wrong  against  the 
corporation  of  which  he  was  a  stockholder  ? 

3.  What  relief  did  the  plaintiff  ask  for?    Why  did  the  court  deny  him 
the  relief  for  which  he  asked  ?    What  should  he  have  alleged  and  proved 
to  have  made  out  his  case  ? 

4.  P  brings  a  bill  in  equity  for  himself  and  other  stockholders  of  the  corpora- 
tion alleging  that  the  corporation  through  its  directors  is  about  to  enter 
into  an  ultra  vires  transaction  and  asking  that  the  corporation  be  enjoined 
from  doing  so.    The  corporation  demurs  to  the  bill.    What  decision  ? 

5.  In  the  foregoing  case,  the  corporation  answers  the  bill  and  says  that 
the  transaction,  although  ultra  vires,  will  be  of  great  benefit  to  the 
corporation  and  the  stockholders.    What  decision  ? 

DECATUR  MINERAL  LAND  COMPANY  v.  PALM 

113  Alabama  Reports  531  (1896) 

COLEMAN,  J.  Otto  Palm  and  others,  minority  stockholders  in 
the  appellant  corporation,  filed  their  bill,  in  which  it  is  averred  that 
appellants,  Thomas  M.  Scruggs  and  S.  M.  Nelson,  controlled  a 
majority  of  the  stock  of  the  corporation,  and  used  their  power  in  the 
selection  of  the  board  of  directors,  and  dominated  the  management  of 
the  corporation  for  their  personal  advantage.  The  principal  wrongs 
complained  of  consist  in  the  election  of  incompetent  and  unfaithful 
persons  as  president  and  secretary,  to-wit,  Thomas  M.  Scruggs  and 
S.  M.  Nelson,  and  the  appropriation  by  the  directors  of  exorbitant 
and  unreasonable  amounts  to  their  salaries,  and  neglect  of  duty  on 
their  part.  The  bill  prays  for  the  removal  of  these  and  other  members 
of  the  board  of  directors,  for  an  injunction  to  restrain  the  board  from 
voting  unreasonable  salaries  hereafter,  for  an  account  to  ascertain 
how  much  they  have  received  over  and  above  what  is  just  and  reason- 
able, a  decree  for  such  excess,  and  a  cancellation  of  the  notes  held  by 
such  officers  against  the  corporation  for  unpaid  salaries,  in  excess  of 
what  they  should  be  allowed.  The  bill  also  prayed  for  a  receiver. 

It  will  be  seen  from  this  statement  of  the  purposes  of  the  bill,  that 
the  corporation  is  the  proper  complainant,  and  that  stockholders  are 
not  allowed  to  apply  to  a  court  of  equity  for  relief  in  such  a  case, 
except  upon  averment  and  proof  that  the  corporation  has  refused, 
upon  application,  to  remedy  the  wrong,  or  upon  sufficient  averments 
to  show  that  application  to  the  board  of  directors  or  stockholders 
would  have  been  in  vain,  or  the  circumstances  were  such  as  to  excuse 


494  LAW  AND  BUSINESS 

the  complaining  stockholders  from  first  seeking  a  remedy  in  this  way, 
if  there  can  be  any  other  in  any  case. 

At  the  final  hearing,  the  court  granted  relief  to  complainants,  in 
so  far  as  the  bill  prayed  for  a  cancellation  of  the  outstanding  and 
unpaid  claims  of  the  president  and  secretary  for  salaries,  and  awarded 
an  injunction  to  restrain  the  board  of  directors  from  voting  unreason- 
able compensation  to  said  officers,  and  allowed  complainants  a 
solicitor's  fee  to  be  paid  by  the  corporation.  The  respondents  appeal 
from  this  decree.  If  the  complainants  were  entitled  to  the  relief 
granted,  the  benefit  resulted  to  the  corporation,  and  through  it  to  all 
the  stockholders,  as  such,  alike.  The  complainants  could  receive  no 
advantage  of  all  the  stockholders.  If  the  corporation  had  filed  the 
bill,  there  can  be  no  doubt  that  its  solicitors  would  have  been  entitled 
to  reasonable  compensation  to  be  paid  by  the  corporation.  Its  refusal 
necessitated  the  filing  of  the  bill  by  the  stockholders.  Under  these 
facts  we  have  no  doubt  that  the  corporation  is  chargeable  with  what- 
ever compensation  the  complainants'  solicitors  are  entitled  to.  The 
amount  of  the  fee,  however,  should  have  been  determined  from  the 
evidence.  We  do  not  think  the  court  could  take  judicial  knowledge 
of  the  value  of  services  rendered  by  the  solicitors.  Clark  v.  Knox, 
70  Ala.  607.  The  evidence  shows  that  S.  M.  Nelson  and  Kate 
Guntherz  were  sisters,  and  Thomas  M.  Scruggs  their  nephew,  that 
these  three  stockholders  owned  but  little  less  than  the  entire  out- 
standing stock,  that  at  some  of  the  meetings  of  the  stockholders,  their 
stock  exceeded  a  majority  of  the  stock  present  and  voting,  and  that 
at  other  meetings  their  stock  and  that  held  by  them  as  proxies  consti- 
tuted a  majority.  The  stock  owned  by  these  three  shareholders  and 
controlled  by  them  was  voted  in  concert,  either  S.  M.  Nelson  or 
Thomas  M.  Scruggs  generally  voting  that  owned  by  Kate  Guntherz. 

It  is  reasonably  clear  that  they  dominated  the  stockholders' 
meetings,  and  elected  the  board  of  directors,  of  which  the  said  Scruggs 
and  Nelson  were  always  included  as  members.  The  by-laws  author- 
ized the  directors  to  fix  the  salaries  of  the  officers  and  elect  them. 
Thomas  M.  Scruggs  and  S.  M.  Nelson  were  members  of  the  board  of 
directors  which  fixed  the  salaries  of  the  president  and  secretary,  and 
which  elected  them  to  these  offices,  and  it  is  satisfactorily  shown  that 
both  were  instrumental  in  fixing  the  amount  to  be  paid,  and  in  elect- 
ing themselves  to  their  respective  offices.  The  pleadings  and  evidence 
show  that  the  board  of  directors  consisted  of  seven  members.  In  the 
seventh  paragraph  of  the  bill  it  is  averred,  that  four  members,  to-wit, 


MANAGEMENT  OF  THE  BUSINESS  UNIT  495 

H.  B.  Scott,  S.  M.  Nelson,  Thomas  M.  Scruggs,  and  J.  C.  Eyster, 
met  and  re-elected  Scruggs  president  at  a  named  salary,  J.  C.  Eyster 
vice-president,  and  S.  M.  Nelson  secretary.  Of  necessity,  Scruggs  and 
Nelson  voted  for  themselves.  This  averment  is  nowhere  controverted, 
We  are  of  opinion  that  the  evidence  leaves  no  room  for  reasonable 
controversy  that  the  salaries  voted  to  the  president  and  secretary, 
when  considered  with  reference  to  the  duties  required  of  and  performed 
by  them,  and  the  financial  condition  of  the  corporation,  were  out  of  all 
proportion,  and  unreasonable.  These  salaries  not  only  consumed  all 
the  income,  but  encroached  annually  upon  the  capital  assets,  and,  if 
continued,  would  eventually  leave  nothing  for  the  stockholders. 
The  duty  of  a  director  is  to  act  for  the  interest  of  the  stockholders, 
and  manage  the  affairs  of  the  corporation  for  their  benefit,  and  not 
for  his  personal  gain.  There  was  a  direct  conflict  between  the  duty 
owed  by  these  directors  to  the  stockholders,  and  their  self-interest; 
and,  as  it  is  frequently  the  case  under  such  conditions,  the  frailty  of 
human  nature  sacrifices  duty  to  self-interest.  They  fixed  the  salaries 
at  exorbitant  prices,  they  elected  themselves  to  the  offices.  The  fact 
that  the  president  may  have  been  unwilling  to  accept  the  office  at  a 
less  salary,  proves  nothing  in  favor  of  the  fairness  and  reasonableness 
of  the  amount.  A  minority  stockholder  who  cannot  obtain  redress 
against  such  a  wrong,  through  the  board  of  directors  or  the  stock- 
holders, is  entitled  to  the  intervention  of  a  court  of  equity,  i  Mora- 
wetz  on  Corporations,  sections  508,  518,  et  seq.;  Cook  on  Stocks  and 
Stockholders,  section  657,  and  notes. 

This  brings  us  to  the  consideration  of  a  question  which  vitally 
affects  complainants'  standing  in  a  court  of  equity.  The  respondents 
demurred  to  the  bill  upon  the  ground  that  the  bill  admitted  that 
complainants  had  not  applied  to  the  board  of  directors  or  to  the 
stockholders  for  redress,  and  failed  to  state  sufficient  reasons  for  not 
doing  so.  The  demurrer  was  overruled,  and  the  same  question  and 
issue  was  raised  by  answer.  After  careful  consideration,  we  are  of 
opinion  that  the  court  erred  in  its  ruling  upon  the  demurrer,  and  in  its 
conclusion  from  the  facts  bearing  upon  this  issue.  In  the  case  of 
Tuscaloosa  Manufacturing  Co.  v.  Cox,  68  Ala.  71,  we  used  this 
language: 

If  it  be  supposed  an  unwise  course  is  being  pursued,  or  that  the  inter- 
ests of  the  corporation  are  suffering,  or  likely  to  suffer  through  the  ineffi- 
ciency or  faithlessness  of  an  official,  an  appeal  should  first  be  made  to  the 
directory  of  governing  body,  to  redress  the  grievance.  Failing  there,  in 


496  LAW  AND  BUSINESS 

ordinary  cases  the  next  redress  will  be  found  in  the  power  of  the  ballot, 
which  usually  comes  into  exercise  at  short  intervals.  We  will  not  say  there 
may  not  be  cases,  in  which  the  strong,  restraining  arm  of  chancery  court 
may  be  invoked  in  the  first  instance.  The  whole  governing  force  may 
become  corrupt,  or  may  enter  into  a  combination,  either  ultra  vires  or  so 
destructive  of  the  policy  and  property  of  the  corporation,  as  to  show  an 
appeal  to  the  directory  would  be  fruitless,  and  delay  extremely  perilous. 
It  should  be  a  strong  case,  however,  to  justify  such  interferences. 

In  the  case  of  Merchants  £r°  Planters  Line  v.  Waganer,  71  Ala.  581, 
we  quoted  approvingly  from  the  case  of  Hawes  v.  Oakland,  104  U.S. 
450,  the  following  principles  of  law  as  applicable: 

A  stockholder  could  appeal  to  the  courts  for  relief,  "where  the  board  of 
directors,  or  a  majority  of  them,  are  acting  for  their  own  interest,  in  a 
manner  destructive  of  the  corporation  itself,  or  of  the  rights  of  the  other 
shareholders."  This  is  precisely  what  is  averred  in  this  case.  "But," 
JUSTICE  MILLER  adds,  "in  addition  to  the  existence  of  grievances  which 
call  for  this  kind  of  relief,  it  is  equally  important  that  before  the  shareholder 
is  permitted  in  his  own  name  to  institute  and  conduct  a  litigation  which 
usually  belongs  to  the  corporation,  he  should  show  to  the  satisfaction  of 
the  court  that  he  has  exhausted  all  the  means  within  his  reach  to  obtain, 
within  the  corporation  itself,  the  redress  of  his  grievances,  or  action  in  con- 
formity to  his  wishes.  He  must  make  an  earnest,  not  a  simulated  effort, 
with  the  managing  body  of  the  corporation,  to  induce  remedial  action  on 
their  part,  and  this  must  be  made  apparent  to  the  court.  If  time  permits, 
or  has  permitted,  he  must  show,  if  he  fails  with  the  directors,  that  he  has 
made  an  honest  effort  to  obtain  action  by  the  shareholders  as  a  body,  in 
the  matter  of  which  he  complains;  and  he  must  show  a  case,  if  this  is  not 
done,  where  it  could  not  be  done,  or  it  was  not  reasonable  to  require  it." 

In  the  case  of  Sterner  v.  Parsons,  103  Ala.  215,  after  citing  the 
foregoing  authorities  it  was  held  that  mere  averments  of  conclusions, 
without  averment  of  the  facts  which  sustained  the  conclusions,  were 
insufficient.  The  reasons  for  the  principle  are  so  strongly  and  clearly 
stated  in  the  cases  cited,  that  we  consider  it  unnecessary  to  fortify 
them  by  additional  argument  or  authority.  It  is  a  settled  question 
in  this  court.  The  abstract  abounds  with  averments,  that  the 
directors  were  dominated  by  the  president  and  secretary,  and  that  an 
application  to  the  board  would  have  been  useless;  but  with  one 
exception  to  be  noticed  presently,  there  is  not  a  single  fact  averred 
to  show  why  the  board  of  directors  would  not  have  interposed  at  the 
request  of  the  complainants.  The  fact  referred  to  is  the  statement 
that  Thomas  M.  Scruggs,  S.  M.  Nelson,  and  Kate  Guntherz  had  the 


.      MANAGEMENT  OF  THE  BUSINESS  UNIT  497 

voting  power  to  control  the  meetings  of  the  stockholders  and  did 
dominate  at  these  meetings.  We  observe  here  that  this  is  the  only 
material  fact  established  by  the  evidence  bearing  upon  this  issue. 
The  question  then  is,  does  the  fact  that  these  three  stockholders  Ton- 
trolled  the  election  of  the  seven  directors  and  did  elect  them  by  their 
votes,  without  more,  authorize  the  legal  presumption  that  the  directors 
thus  elected  would  refuse  to  discharge  their  duties  as  directors  to  the 
corporation  and  the  stockholders,  when  requested  by  the  stockholders  ? 
The  case  of  Mack  v.  DeBardeleben,  go  Ala.  401,  cannot  be  regarded 
as  an  authority.  In  the  first  place,  this  issue  was  not  before  the 
court.  In  the  second  place,  the  decision  of  the  question  was  expressly 
pretermitted,  and  arguendo,  it  was  stated  that  possibly  "the  pre- 
sumption would  be,  that  he  [a  director]  would  exercise  his  power  in 
the  interest  of  the  company  to  which  he  owed  his  election."  There  is 
no  ground  for  such  a  presumption  in  the  present  case.  The  directors 
were  stockholders.  In  the  absence  of  causes  to  influence  them 
otherwise,  the  presumption  is  that  they  would  do  their  duty,  and 
this  presumption  is  greatly  strengthened  when  the  effect  of  duty  was 
to  promote  their  personal  interest.  Porter  v.  Pittsburgh  Bessmer  Steel 
Co.,  120  U.S.  670.  With  the  exception  of  the  stockholders  who  as 
officers  received  salaries,  the  interest  of  the  other  members  of  the 
board  of  directors,  as  well  as  their  official  duty,  required  a  prompt 
interference  to  redress  the  wrong.  The  pleadings  and  evidence  show 
that  two  of  the  directors  are  complainants.  J.  C.  Eyster,  M.  R. 
Leadingham,  and  we  presume  H.  B.  Scott,  together  with  Thomas  M. 
Scruggs  and  S.  M.  Nelson,  comprise  the  seven  who  constituted  the 
board  of  directors.  We  find  no  averment  in  the  bill,  that  H.  B. 
Scott,  M.  R.  Leadingham,  and  J.  C.  Eyster,  or  any  two  of  them,  voted 
for  the  salaries,  or  for  Scruggs  as  president  and  Nelson  as  secretary, 
nor  do  we  find  any  sufficient  averments  in  the  bill,  to  show  that  they, 
or  at  least  two  of  them,  would  not  have  co-operated  with  the  two 
members  who  are  complainants  in  the  present  bill.  We  are  satisfied 
that  an  application  to  the  stockholders  would  have  been  a  "vain  and 
useless  undertaking."  It  is  clear  that  the  president  and  secretary 
dominated  the  stockholders.  If  any  further  evidence  than  that 
already  stated  was  needed  on  this  point,  it  is  to  be  found  in  the 
ratification  by  the  stockholders  at  a  meeting  held  since  the  beginning 
of  this  suit,  at  which  the  salaries  fixed  and  the  election  and  conduct 
of  the  president  and  secretary  were  approved.  At  this  meeting,  the 
president  and  secretary,  voting  their  own  stock,  and  that  of  their 


498  .  LAW  AND  BUSINESS 

relative,  Kate  Guntherz,  had  no  difficulty  in  obtaining  a  ratification 
of  their  own  previous  actions.  This  fact,  however,  did  not  relieve 
the  minority  stockholders  from  applying  to  the  directors,  unless  there 
were  other  circumstances  which  relieved  them  from  this  duty.  The 
bill  and  evidence  is  insufficient  on  this  point.  Ordinarily,  we  would 
render  a  decree  of  the  court  below,  and  dismiss  complainants'  bill, 
but  we  find  difficulties  owing  to  the  condition  of  the  case  as  presented 
in  the  abstract,  when  submitted  for  final  decree.  In  the  beginning  of 
the  abstract  it  is  stated  that  the  bill  is  filed  against  the  corporation 
and  six  named  directors.  Included  in  these  named  directors  is  Kate 
Guntherz.  This  would  make  eight  directors,  yet  the  pleadings  elsewhere 
and  the  evidence  show  that  seven  directors  constituted  the  entire  board. 
In  the  answers  it  is  admitted  that  Kate  Guntherz  is  a  director  as 
averred.  Process  is  prayed  against  her  as  a  respondent.  The 
minutes  of  the  stockholders'  meeting  held  February  8,  1892,  at  which 
the  directors  were  elected,  who  were  in  office  at  the  time  of  the  filing 
of  the  bill,  does  not  show  that  she  was  elected  a  director,  but  names 
other  seven.  She  was  made  a  respondent  to  the  bill.  The  abstract 
fails  to  show  that  as  to  her  the  case  was  at  issue.  She  has  not 
answered,  and  there  has  been  no  decree  pro  confesso  against  her. 
Again,  the  bill  makes  S.  M.  Nelson  a  material  defendant,  and  the 
decree  affects  her  personally.  She  has  no  answer  on  file.  There  is 
a  mere  reference  in  one  place  that  she  filed  a  plea  of  coverture,  but 
this  plea  does  not  seem  to  have  been  considered  by  the  parties  or  the 
court  in  any  way.  The  abstract  abounds  in  errors  as  to  dates,  some 
of  which  only  we  have  been  able  to  correct  from  other  parts  of  the 
abstract.  In  this  condition  of  the  record,  we  have  felt  it  our  duty 
to  reverse  and  remand  the  cause,  and  have  stated  the  law  applicable  to 
the  case,  for  future  guidance  of  the  court. 

Reversed  and  remanded. 

QUESTIONS 

1.  Why  was  the  judgment  of  the  lower  court  in  favor  of  the  plaintiff 
reversed  ? 

2.  P  brings  a  bill  in  equity  against  the  corporation  of  which  he  is  a  member, 
and  its  directors,  alleging  that  the  directors  have  sold  to  themselves 
property  of  the  corporation  at  grossly  inadequate  prices  and  asking 
that  the  directors  be  compelled  to  account  to  the  corporation  for  the 
profits  which  they  made  in  the  various  transactions.    The  defendants 
demur  to  the  bill.    What  decision  ? 

3.  P  brings  a  bill  in  equity  against  the  corporation  and  its  directors,  alleging 
that  the  directors  are  mismanaging  the  corporation  in  the  interest  of  a 


•  MANAGEMENT  OF  THE  BUSINESS  UNIT  499 

rival  corporation  of  which  the  directors  are  stockholders  and  asking 
that  they  be  removed  from  office  and  that  a  receiver  be  appointed  to 
assume  control  over  the  affairs  of  the  corporation.  The  defendants 
demur.  What  decision  ? 

4.  The  corporation  of  which  P  is  a  stockholder  has  a  valid  claim  against 
X  and  a  claim  which  ought  to  be  enforced.     How  can  P,  representing 
the  minority  stockholders,  secure  enforcement  of  this  claim  ? 

5.  The  corporation  has  a  claim  against  Y,  the  enforcibility  of  which  is 
doubtful.    Will  the  court  at  the  suit  of  P  compel  the  corporation  to 
sue  on  this  claim  ? 

PARSONS  v.  JOSEPH 
92  Alabama  Reports  403  (1890) 

The  bill  in  this  case  was  filed  on  the  nineteenth  day  of  July,  1890, 
by  Henry  Joseph,  as  a  stockholder  in  the  Birmingham,  Powderly  & 
Bessemer  Street  Railway  Co.,  against  the  said  corporation  and  J.  H. 
Parsons;  and  sought  the  cancellation  of  certain  certificates  of  stock 
issued  by  the  corporation  to  said  Parsons  on  the  ground  that  the 
stock  was  fictitious  and  fraudulent.  'There  was  a  demurrer  to  the 
bill,  and  a  motion  to  dissolve  the  injunction,  each  of  which  was  over- 
ruled; and  this  appeal  is  sued  out  by  the  defendants  from  the  inter- 
locutory decree. 

COLEMAN,  J.  The  purpose  of  the  bill  is  to  have  certain  certifi- 
cates of  stock  issued  by  the  Birmingham,  Powderly  &  Bessemer  Street 
Railway  Co.  to  defendant  Parsons,  canceled,  on  the  ground  that  the 
stock  is  fictitious,  and  was  issued  in  violation  of  the  constitution  and 
statute  law  of  the  state.  The  bill  prayed  an  injunction,  and  the  writ 
was  awarded  by  the  chancellor.  A  demurrer  was  interposed,  and 
also  an  answer  by  the  defendant  Parsons.  The  cause  was  submitted 
for  decree  on  the  demurrer,  and  upon  motion  to  dissolve  the  injunction. 
The  court  overruled  the  demurrer,  and  denied  the  motion  to  dissolve 
the  injunction,  and  from  this  interlocutory  decree  the  appeal  is  taken. 

Among  other  averments,  the  bill  substantially  alleges  that  plaintiff 
is  a  bona  fide  stockholder  in  said  company;  that  shortly  after  the 
organization  of  the  company,  the  defendant  subscribed  for  one 
hundred  and  seven  shares  of  the  capital  stock  of  the  company, 
of  the  par  value  of  fifty  dollars  each,  and  paid  for  the  same  in  full  by 
conveying  to  the  company  thirty-nine  acres  of  land  (describing  the 
land)  at  an  agreed  price  and  valuation  of  one  hundred  and  thirty-seven 
dollars  per  acre,  when  the  land  was  not  worth  more  than  twenty- 


500  LAW  AND  BUSINESS 

five  dollars  per  acre,  and  for  this  land  Parsons  was  to  receive  one  hundred 
dollars  and  seven  shares  of  stock;  but  shortly  thereafter  the  capital 
stock  of  the  company  was  doubled,  and  without  further  consideration 
than  the  thirty-nine  acres  of  land,  Parsons'  stock  was  doubled,  and 
he  received  two  hundred  and  fourteen  shares  of  the  capital  stock. 
The  bill,  as  amended,  charges  that  the  excessive  valuation  of  the  land 
was  made  knowingly,  wilfully,  and  with  the  fraudulent  intent  of 
having  issued  to  Parsons  the  fictitious  stock,  in  violation  of  law.  This 
is  a  sufficient  statement  of  the  facts  for  the  consideration  of  the 
demurrer. 

The  demurrer  admits  the  truth  of  the  averments.  It  is  contended 
that  the  bill  is  defective  in  not  averring  that  plaintiff  was  a  stock- 
holder at  the  time  of  the  transaction,  complained  of  as  being  fraudu- 
lent, or  that  his  stock  devolved  upon  him  by  operation  of  law. 

In  the  case  of  Dimpfell  v.  Ohio  &  Miss.  Railroad  Co.,  no  U.S., 
p.  208,  relied  upon  by  appellant,  it  was  held,  that  a  stockholder,  con- 
testing as  idtra  vires  an  act  of  the  directors,  should  aver  "that  he  was 
a  stockholder  at  the  time  of  the  transaction  of  which  he  complains, 
or  that  his  shares  have  devolved  on  him  since  by  operation  of  law." 
To  the  same  effect  was  Hawes  v.  Oakland,  104  U.S.  450;  and  many 
others  might  be  cited.  Upon  an  examination  of  these  authorities, 
it  will  be  seen  that  the  principle  asserted  rests  solely  upon  equity 
Rule  No.  94,  adopted  by  the  United  States  Supreme  Court,  and 
which  may  be  found  in  the  preface  to  Volume  104,  of  U.S.  Reports. 
Morawetz  on  Private  Corporations,  speaking  of  this  rule,  says,  it  was 
evidently  designed  as  a  rule  of  practice  merely,  and  was  deemed  neces- 
sary to  guard  courts  from  being  imposed  upon  by  collusion  of  parties. 
Morawetz  on  Private  Corporations,  sections  269,  270.  The  rule  is  not 
a  general  principle  of  law,  applicable  to  pleadings  in  all  the  courts, 
and  has  never  been  applied  to  the  courts  of  this  state.  The  demurrer 
to  the  bill  for  failing  to  make  this  averment  was  properly  overruled. 

The  motion  to  dissolve  the  injunction  was  heard  upon  the 
sworn  bill  and  answer.  The  answer  denied  that  plaintiff  was  a  bona 
fide  stockholder  and  set  up  that  plaintiff  was  the  transferee  of  one  E. 
Lesser.  The  answer  admits  that  defendant's  stock  was  doubled  with- 
out the  payment  of  any  additional  consideration  than  that  of  the 
land;  but  by  way  of  explanation  and  defense,  avers  that  the  lands 
were  not  truly  and  properly  valued  at  first,  and  the  increased  valua- 
tion of  the  lands  only  raised  them  to  their  real  and  true  value,  and 
the  additional  issue  of  stock  was  for  property  at  its  fair  valuation. 


MANAGEMENT  OF  THE  BUSINESS  UNIT  501 

The  answer  continues,  however,  as  follows:  that  if  said  transaction 
had  been  illegal,  and  fraudulent,  and  not  done  in  good  faith,  com- 
plainant is  estopped  from  setting  up  fraud  in  said  transaction,  or 
seeking  to  cancel  said  stock,  because  E.  Lesser,  who  was  complain- 
ant's transferrer,  participated  in  all  of  said  transactions  and  himself 
fixed  the  value  of  said  lands,  with  full  knowledge  of  and  after  full 
investigation  of  the  value  of  said  land. 

A  transferee  of  stock  is  not  necessarily  disqualified  as  a  suitor  in 
all  cases,  because  the  prior  holders  were  personally  disqualified.  If 
the  transferee  purchased  the  shares  in  good  faith,  and  without  notice 
of  the  fact  that  the  prior  holder  had  precluded  himself  from  suing,  he 
would  have  as  just  a  title  to  relief,  as  if  he  had  purchased  from  a  share- 
holder who  was  under  no  disability;  but,  if  the  purchaser  was  aware 
that  the  prior  holder  had  barred  his  right  to  relief,  neither  justice  nor 
public  policy  would  require  that  the  transferee,  under  these  circum- 
stances, should  be  accorded  any  greater  rights  than  his  transferrer. 
Morawetz,  supra,  section  267. 

The  same  rule  prevails  in  this  state  in  favor  of  derivative  pur- 
chasers. A  claimant  who  was  a  bona  fide  purchaser,  without  notice 
of  a  fraud,  or  of  facts  which  the  law  considers  sufficient  to  establish  it, 
or  from  which  it  is  inferable  then,  could  not  be  affected  by  notice 
to  his  vendor.  H  or  ton  v.  Smith,  8  Ala.  78;  Fenno  v.  Sayre,  3  Ala.  458; 
Weer  v.  Davis,  4  Ala.  442;  Martinez  v.  Lindsey,  91  Ala.  334;  Wait  on 
Insolvent  Corporations,  sections  628,  630. 

If  a  stockholder  participates  in  a  wrongful  or  fraudulent  contract 
or  silently  acquiesces  until  the  contract  becomes  executed,  he  cannot 
then  come  into  a  court  of  equity,  to  cancel  the  contract,  and  more 
especially,  if  the  company,  or  himself,  as  a  stockholder,  has  reaped 
a  benefit  from  the  contract;  and  this  rule  holds  good,  although  the 
consideration  of  the  contract  may  be  one  expressly  prohibited  by 
statute.  The  same  disability  would  attach  to  the  transferee  of  his 
stock  who  bought  with  notice.  We  consider  this  general  rule  of 
equity  abundantly  sustained.  Morawetz  on  Private  Corporations, 
sections  261,  262 ;  Cook  on  Stock  and  Stockholders,  sections  39,  40,  735; 
Wright  v.  Hughes,  12  Amer.  St.  Rep.  413.  It  is  sustained  by  the 
familiar  rule  that  he  who  invokes  the  aid  of  a  court  of  equity  must 
have  clean  hands.  Mr.  Cook  states  the  conditions  upon  which  a 
stockholder  can  sustain  a  suit  to  remedy  the  frauds,  ultra  vires  acts 
or  negligence  of  directors,  to  be,  first,  the  acts  complained  of  must  be 
such  as  to  amount  to  a  breach  of  trust,  and  such  as  neither  a  majority 


502  LAW    AND  BUSINESS 

of  the  directors  nor  of  the  stockholders  can  ratify  or  condone;  second, 
that  the  complaining  stockholder  himself  is  free  from  laches,  or  acquies- 
cence in  the  acts  to  remedy  which  the  suit  is  brought;  third,  that  the 
corporation  has  been  requested  and  refused  or  neglected  to  institute 
the  suit,  that  the  suit  is  instituted  by  bona  fide  stockholders  as  com- 
plainants, and  that  the  corporation  and  the  guilty  parties,  and  other 
proper  parties  have  been  made  defendants.  Cook,  supra,  section  646. 

If  the  averments  of  the  bill  are  sustained  by  proof,  the  stock  issued 
to  the  defendants  was  in  violation  of  section  1662  of  the  Code  and  of 
section  6,  Article  XIV  of  the  Constitution.  On  the  contrary,  if 
the  proof  shows  that  the  property  was  received  in  payment  of  stock, 
at  a  fair  valuation,  such  would  not  be  the  result.  Dams  Brothers  v. 
Montgomery  Fur.  &  Chemical  Co.,  at  present  term. 

In  cases  where  the  stockholders  or  the  company  by  any  laches, 
acquiescence,  or  participation  in  the  unlawful  and  fictitious  issue  of 
the  stock  or  for  any  other  sufficient  cause  are  precluded  from  institut- 
ing the  proper  proceedings,  to  remedy  the  wrong,  the  remedy  is  still 
open  to  the  state  to  institute  all  necessary  and  proper  proceedings  to 
vacate  and  dissolve  the  corporation,  or  have  such  other  proper 
judgment  and  decree  rendered,  as  the  proof  and  justice  may  demand. 

It  may  be  that  stockholders,  who  knowingly  and  intentionally 
have  subscribed  and  paid  for  stock  with  property  upon  a  fictitious 
valuation,  are  liable  as  stockholders  who  have  not  paid  up  in  full  for 
their  stock,  within  the  meaning  of  the  statute,  to  creditors  who  have 
not  precluded  themselves  from  maintaining  this  suit.  Wait,  supra, 
section  593;  Douglas  v.  Ireland,  73  N.Y.  100;  Boynton  v.  Andrews, 
63  N.Y.  93. 

Applying  the  rule  of  law  applicable  when  a  motion  to  dissolve  an 
injunction  is  submitted  upon  bill,  exhibits,  and  answer,  and  consider- 
ing only  so  much  of  the  answer  as  is  responsive  to  the  bill,  we  are  of 
opinion  that  the  decretal  order,  overruling  the  demurrers  and  motion 
to  dissolve  the  injunction,  is  free  from  error. 

Affirmed. 
QUESTIONS 

1.  The  D  Company  with  the  assent  of  all  of  its  stockholders  executed  an 
ultra  vires  lease  of  its  property  to  X.     P,  a  stockholder  of  the  corporation, 
brings  this  bill  against  the  D  Company  and  X,  asking  that  the  lease  be 
canceled.    What  decision  ? 

2.  In  the  foregoing  case,  P  transfers  his  stock  to  B  who  is  at  the  time 
ignorant  of  the  ultra   vires  transaction.     He  brings  this  bill  to  have 
the  transaction  declared  void.    What  decision  ? 


MANAGEMENT  OF  THE  BUSINESS  UNIT  503 

3.  The  D  Company  entered  into  an  ultra  vires  contract.     P,  among  other 
stockholders,  objected  to  the  transaction.     P  transfers  his  stock  to  B 
who  takes  the  stock  without  knowledge  of  the  ultra  vires  transaction. 
B  brings  this  action,  asking  that   the   transaction  be  declared  void. 
What  decision  ? 

4.  In  the  foregoing  case,  B  buys  the  stock  with  knowledge  that  the  corpo- 
ration had  just  entered  into  the  ultra  vires  transaction.    B  asks  that 
the  transaction  be  declared  void.    What  decision  ? 

5.  P,  owner  of  one  share  of  stock  in  the  D  Company,  brings  a  bill,  asking 
that  the  corporation  be  enjoined  from  entering  into  a  certain  ultra  vires 
transaction.    The  corporation  contends  that  he  cannot  maintain  this 
bill  because  his  interest  is  so  slight.    What  decision  ? 

6.  P  knows  that  the  D  Company  has  executed  an  ultra  vires  lease  of  its 
property.    He  buys  five  shares  of  stock  which  is  not  estopped  to  question 
the  validity  of  the  transaction  for  the  very  purpose  of  beginning  litigation 
to  upset  the  transaction.    What  decision  in  an  action  by  P  to  have  the 
lease  canceled  ? 

7.  P  is  a  large  stockholder  in  B  Company,  a  rival  of  the  D  Company.     He 
buys  ten  shares  of  stock  in  the  latter  company  and  brings  proceedings 
to  have  the  transaction  in  question  canceled.    His  purpose  is  to  embar- 
rass the  D  Company.    What  decision  ? 


b)    Powers  of  Individual  Members 

KATZ  v.  BREWINGTON 
71  Maryland  Reports  79  (1889) 

Charles  Brewington  filed  a  bill  of  complaint  against  Louis  Katz, 
alleging  that  in  May,  1887  they  had  entered  into  a  copartnership 
under  the  name  of  L.  Katz  &  Co.;  and  that  the  business  had  been 
carried  on  under  the  firm  name  until  the  time  of  the  filing  of  the  bill. 
It  was  further  charged  that  the  books  of  the  firm  were  in  the  possession 
and  control  of  Louis  Katz,  who  refused  to  permit  the  complainant 
to  have  access  to  the  same;  and  that  Katz  had  sole  control  and  posses- 
sion of  the  goods  of  the  firm,  and  was  disposing  of  the  same  in  fraud 
of  complaint. 

That  complainant  no  longer  felt  safe  with  the  books  and  papers 
and  assets  of  said  firm  in  the  possession  of  said  Katz,  and  desired  that 
said  copartnership  should  be  wound  up  under  the  order  and  direction 
of  this  court. 

That  Katz  absolutely  excluded  complainant  from  all  control  of 
the  business,  and  refused  to  give  him  any  information  in  regard  to 


504  LAW  AND  BUSINESS 

the  business  of  the  firm,  having  carried  the  books  of  the  firm  away 
from  the  place  of  business  of  said  firm,  and  refused  to  disclose  the  place 
where  said  books  were  deposited. 

The  court  ordered  an  injunction,  and  set  down  for  hearing  the 
application  for  a  receiver,  directing  that  notice  should  be  given  to 
the  defendant.  The  notice  was  not  served  in  due  time;  but,  neverthe- 
less, the  parties  appeared  in  court,  by  counsel,  on  the  day  appointed 
for  the  hearing,  and  after  the  court  had  heard  their  statements  on 
the  bill  and  exhibit,  it  appointed  a  receiver.  After  the  appointment 
of  a  receiver,  an  answer  was  filed  by  defendant,  and  an  appeal  was 
taken. 

BRYAN,  J.  We  are,  of  course,  on  this  appeal,  confined  to  the 
statements  of  the  bill  of  complaint.  The  defendant  might  have 
objected  to  the  motion  for  a  receiver,  on  the  ground  that  he  had  not 
received  the  required  notice;  but  he  does  not  appear  to  have  done 
so.  If  he  had  filed  his  answer  before  the  hearing,  it  would  have 
been  considered,  both  in  the  court  below,  and  in  this  court. 

The  time  appointed  for  the  continuance  of  the  partnership  had 
expired  before  the  filing  of  the  bill  of  complaint,  and  it  was  then  exist- 
ing only  by  the  mutual  consent  of  the  partners.  The  agreement  of 
partnership  required  Katz  to  furnish  all  the  capital,  and  the  profits 
were  to  be  equally  divided,  after  payment  of  debts  and  expenses. 
It  was  not  alleged  by  the  complainant  that  any  profits  had  been  made, 
or  that  there  were  any  debts  due  by  the  partnership.  It  was,  how- 
ever, alleged  that  the  defendant  had  excluded  from  him  all  control 
of  the  business  of  the  firm;  and  had  refused  to  give  him  any  informa- 
tion respecting  it,  and  had  carried  away  the  books  from  the  place  of 
business,  and  had  refused  to  disclose  the  place  in  which  they  were. 
Each  partner  has  an  equal  right  to  take  part  in  the  management  of 
the  business  of  the  firm;  although  one  of  them  may  have  an  interest 
only  in  the  profits,  and  not  in  the  capital,  yet  his  rights  are  involved 
in  the  proper  conduct  of  the  affairs  of  the  firm,  so  that  profits  may  be 
made.  So  each  partner  has  an  equal  right  to  information  about  the 
partnership  affairs,  and  to  free  access  to  its  books.  The  complainant 
had  a  right  to  learn  from  the  books  whether  there  were  profits,  and 
whether  there  were  debts.  If  he  were  denied  this  information,  as 
charged  in  his  bill  of  complaint,  a  sufficient  reason  appears  for  not 
alleging  that  profits  had  been  earned,  and  that  debts  existed.  In 
Ernst  v.  Harris,  i  Turner  &  Russell,  496,  LORD  ELDON  said:  "The 
most  prominent  point  on  which  the  court  acts  in  appointing  a  receiver 


MANAGEMENT  OF  THE  BUSINESS  UNIT  505 

of  a  partnership  concern,  is  the  circumstance  of  one  partner  having 
taken  upon  himself  the  power  to  exclude  another  partner  from  as  full 
a  share  in  the  management  of  the  partnership  as  he,  who  assumes 
that  power,  himself  enjoys."  This  principle  seems  to  be  universally 
approved  by  the  authorities.  It  is  decisive  of  the  present  question. 
The  order  must  be  affirmed. 

QUESTIONS 

1.  What  was  the  relief  asked  for  in  the  principal  case?    Why  was  this 
particular  relief  asked  for?    To  what  other  relief  might  the  plaintiff 
have  been  entitled  ? 

2.  Suppose  that  it  had  been  agreed  by  the  partners  in  their  .articles  of 
partnership  that  the  defendant  should  have  the  exclusive  management 
of  the  business,  would  the  court  have  reached  the  same  conclusion  ? 

3.  A  and  B  are  engaged  in  business  as  partners.    By  their  agreement, 
A  furnished  all  the  capital  and  B  furnished  his  skilled  service.    A 
excludes  B  from  any  part  in  the  management  of  the  concern.    To  what 
relief,  if  any,  is  B  entitled  ? 

4.  Compare  the  right  of  a  stockholder  in  a  corporation  to  participate  in 
the  management  of  the  business,  with  the  right  of  a  partner  so  to 
participate. 

MORTON  GRAVEL  ROAD  COMPANY  v.  WYSONG 

51  Indiana  Reports  4  (1875) 

DOWNEY,  J.  With  reference  to  the  by-law  of  this  corporation, 
set  out  in  the  agreement  of  facts,  it  may  be  remarked,  that  it  was 
passed  or  adopted  by  the  directors  of  the  corporation,  and  not  by  the 
company,  and  the  question  arises,  therefore,  whether  the  directors 
could  legally  pass  the  by-law,  supposing  it  to  be  one  which  in  other 
respects  might  be  legally  enacted.  The  fifteenth  section,  to  which 
we  have  already  referred,  gives  the  power  to  make  by-laws  to  the 
company.  Its  language  is,  "Such  company  may  fill  all  vacancies 
occurring  in  their  board  of  directors,  by  resignation  or  otherwise, 
by  the  remaining  directors,  at  any  of  their  meetings,  and  may  make, 
enact,  and  publish  any  and  all  ordinances  and  by-laws  which  they 
may  deem  proper,"  etc.  While  the  company  may  fill  vacancies  by 
the  remaining  directors,  the  directors  are  not  empowered  to  enact 
by-laws.  This  must  be  done  by  the  corporators,  or  company.  Omit- 
ting the  part  of  the  language  quoted  which  relates  to  filling  vacancies, 
the  remaining  part  reads  as  follows:  "Such  company  may  make, 
enact,  and  publish  any  and  all  ordinances  and  by-laws, "  etc. 


506  LAW  AND  BUSINESS 

This  is  in  conformity  to  the  statute  on  the  subject,  entitled  "an 
act  establishing  general  provisions  respecting  corporations,"  i  G.  &  H. 
267,  section  2  of  which  provides  that  "corporations  shall,  where  no 
other  provision  is  specially  made,  be  capable,  in  their  corporate  name, 
to  make  necessary  by-laws,"  etc. 

The  power  to  make  by-laws  resides  in  the  members  of  the  corpora- 
tion at  large,  where  there  is  no  law  or  valid  usage  to  the  contrary. 

QUESTIONS 

1 .  What  are  the  functions  of  the  by-laws  of  a  corporation  ? 

2.  Does  a  corporation  have  the  power  to  adopt  by-laws  in  the  absence 
of  an  express  authorization  to  do  so  ? 

3.  By  whom  should  the  by-laws  be  drawn  up?    By  whom  adopted? 
What  considerations  should  govern  in  the  matter  of  drawing  up  and 
adopting  by-laws  ? 

4.  What  matters  are  usually  regulated  by  the  by-laws  of  an  organization  ? 

5.  Does  a  partnership  usually  have  by-laws?    Does  it  need  them? 

BANK  OF  HOLLY  SPRINGS  v.  PINSON 

58  Mississippi  Reports  421  (1880) 

This  is  an  action  of  assumpsit  brought  by  Sina  D.  Pinson  against 
the  "Holly  Springs  Savings  and  Insurance  Co.,"  whose  name  was 
changed,  pending  the  litigation,  to  the  "Bank  of  Holly  Springs." 
The  object  of  the  suit  was  to  recover  damages  for  the  refusal  of  the 
bank  to  transfer  on  its  books  certain  certificates  of  stock  which  had 
been  assigned  to  the  plaintiff  by  B.  S.  and  William  Crump.  The 
bank  defended  the  action  on  the  ground  that  the  Crumps  were 
indebted  to  it  in  an  amount  exceeding  the  value  of  their  stock,  and 
that,  under  a  by-law  of  the  corporation,  the  bank  had  a  lien  upon  the 
stock  assigned,  for  their  indebtedness,  and  they  were  prohibited  from 
transferring  their  stock  in  such  circumstances.  A  supplemental 
statement  of  the  case  will  be  found  in  the  opinion  of  the  court. 

GEORGE,  J.  The  principal  question  raised  by  this  record  is 
whether  the  plaintiff  in  error,  under  its  charter  and  by-laws,  and  the 
certificates  of  stock  involved  in  this  controversy,  has  a  lien  on  the  stock 
as  against  the  defendant  in  error. 

By  the  third  section  of  the  charter  of  the  Holly  Springs  Savings 
and  Insurance  Co.,  now  called  the  Holly  Springs  Bank,  a  directory  of 
five  persons  and  a  president  were  provided  for,  and  they  were 
empowered  to  make  "all  needful  rules,  by-laws,  and  regulations  for 


MANAGEMENT  OF  THE  BUSINESS  UNIT  507 

the  control  and  management  of  the  business  and  affairs  of  said 
company,  its  property,  and  the  mode  and  manner  of  transferring  its 
stock,  and  any  and  all  other  questions  which  in  their  judgment  will 
promote  the  interest  of  said  company;  provided,  the  same  are  not 
inconsistent  with  the  Constitution  and  laws  of  the  United  States 
or  this  state." 

Under  this  section  the  company  made  various  by-laws,  of  which 
section  13  provided  that  "  the  stock  of  the  company  shall  be  assignable 
only  on  the  books  of  the  company;  and  a  transfer-book  shall  be 
kept,  in  which  all  assignments  and  transfers  of  stock  shall  be  made, 
and  no  transfer  of  the  stock  of  the  association  shall  be  made  by 
any  stockholder  who  shall  be  liable  to  the  company  for  any  sum 
of  indebtedness,  either  as  principal  or  otherwise,  and  certificates  of 
stock  shall  contain  upon  them  notice  of  this  provision"  Section  14 
provided  that  "certificates  of  stock,  signed  by  the  president  and 
cashier,  may  be  issued  to  stockholders,  and  that  the  certificates  shall 
state  on  their  face  that  the  stock  is  transferable  only  upon  the  transfer- 
books  of  the  company;  and  when  stock  is  transferred,  the  certificates 
thereof  shall  be  returned  to  the  company  and  canceled  and  new 
certificates  issued." 

In  February,  1894,  a  certificate  for  stock  duly  signed,  was  issued 
to  B.  S.  Crump,  as  follows:  "This  is  to  certify  that  B.  S.  Crump  is 
entitled  to  eighty-two  shares,  of  fifty  dollars  each,  numbered  78,  in 
the  Holly  Springs  Savings  and  Insurance  Co.,  transferable  at  the 
office,  in  person  or  by  attorney."  At  the  same  time  a  similar  certifi- 
cate numbered  79,  was  issued  to  William  Crump. 

In  March,  1878,  B.  S.  and  W.  Crump,  being  in  possession  of  these 
certificates,  borrowed  $6,000  from  the  defendant  in  error,  and  assigned 
both  these  certificates  to  her  as  collateral  security  for  the  loan.  This 
assignment  was  indorsed  on  the  back  of  each  certificate,  and  is  in  the 
following  words:  "For  value  received,  I  assign  this  certificate  of  stock 
to  S.  D.  Pinson,  and  authorize  her,  as  my  attorney,  to  demand  and 
have  transfer  of  the  same  made  to  her  on  the  books  of  the  company," 
and  signed  by  the  assignor. 

Mrs.  Pinson,  before  advancing  the  money,  gave  notice  of  this 
pledge  to  the  bank;  and  the  note  given  for  the  loan  not  falling  due 
till  the  fall  of  the  year,  when  yellow  fever  was  raging  in  Holly  Springs, 
and  the  bank  on  that  account  was  closed,  she  made  no  demand  for 
a  transfer  on  the  books  till  in  December  of  the  same  year,  which 
transfer  being  refused  by  the  bank,  she  brought  this  action  to  recover 


508  LAW  AND  BUSINESS 

damages  on  account  of  said  refusal.  She  recovered  judgment  for 
the  full  value  of  the  stock,  $8,200. 

The  cause  has  been  argued  with  distinguished  ability  on  both 
sides,  both  at  the  bar  and  in  writing.  The  authorities  cited  on  both 
sides  are  very  numerous,  and  their  perusal  has  greatly  aided  us  in 
arriving  at  the  conclusion  we  have  reached. 

It  is  well  settled  that  at  common  law  a  corporation  has  no  lien 
on  the  stock  of  its  shareholders  for  an  indebtedness  to  it.  Such  liens, 
when  they  exist,  result  either  from  a  provision  in  the  charter  to  that 
effect,  or  from  a  by-law  enacted  by  the  corporation  in  pursuance  of 
authority  conferred  by  the  charter.  Usually  the  lien,  when  it  exists 
at  all,  is  given  by  the  charter,  which,  being  a  public  law,  as  well  as  the 
act  by  which  the  corporation  is  created,  is  notice  to  all  persons  dealing 
with  the  company.  Union  Bank  v.  Laird,  2  Wheat.  390.  The  lien 
may,  however,  be  created  by  a  by-law,  as  was  held  at  an  early  day 
by  LORD  CHANCELLOR  MACCLESFIELD  in  Child  v.  Hudson  Bay  Co., 
2  P.  Wms.  12,  and  very  generally  since.  When  thus  created,  there 
seems  to  be  some  diversity  of  opinion  as  to  its  effect  against  an 
innocent  purchaser  of  the  stock  for  value  and  without  notice  of  the 
lien.  Morse,  in  his  work  on  Banks  and  Banking  (p.  442),  denies  that 
the  lien  can  be  created  by  by-law  alone  as  against  such  purchaser, 
and  Potter  on  Corporations  (sec.  355),  says  this  is  unsettled. 

This  difference  is  more  apparent  than  real,  for  it  seems  to  be 
well  recognized  that  a  by-law  has  no  extra-corporate  force,  and  is 
only  binding  on  those  dealing  with  the  corporation  who  have  notice 
of  it,  or  who  deal  with  it  under  such  circumstances  that  they  are 
bound  to  take  notice  of  it.  A  solution  of  the  question  will  be  found 
in  the  right  determination  of  the  categories  in  which  notice  is  inferred. 
By-laws  of  private  corporations  are  not  in  the  nature  of  legislative 
enactments,  so  far  as  third  persons  are  concerned.  They  are  mere 
regulations  of  the  corporation  for  the  control  and  management  of 
its  own  affairs.  They  are  self-imposed  rules,  resulting  from  an  agree- 
ment or  contract  between  the  corporation  and  its  members  to  conduct 
the  corporate  business  in  a  particular  way.  They  are  not  intended 
to  interfere  in  the  least  with  the  rights  and  privileges  of  others  who 
do  not  subject  themselves  to  their  influence.  It  may  be  said  with 
truth,  therefore,  that  no  person  not  a  member  of  the  corporation  can 
be  affected  in  any  of  his  rights  by  a  corporate  by-law  of  which  he  has 
no  notice.  In  some  instances,  as  we  have  seen,  if  he  have  no  actual 
notice  he  will  be  held  to  have  constructive  notice.  In  dealing  with  an 


MANAGEMENT  OF  THE  BUSINESS  UNIT  509 

officer  or  agent  of  the  company,  a  third  person,  as  in  other  cases  of 
agency,  is  bound  to  'ascertain  the  authority  of  the  person  with  whom 
he  deals.  If  he  deal  with  an  officer — as,  president  or  cashier — the 
general  scope  of  whose  duties  is  well  known  and  ascertained  by  law, 
he  may  rely,  without  further  inquiry,  on  such  officer  possessing  the 
ordinary  and  usual  powers.  He  is  not  bound  by  any  secret  limitation 
or  restriction  placed  on  them  by  the  by-laws  or  otherwise.  If  he  deals 
with  such  officer  in  relation  to  a  matter  outside  of  these  ordinary  and 
usual  powers,  or  with  a  special  agent,  he  is  bound  to  inquire  into  his 
authority.  So,  if  the  transaction  be  about  a  matter  on  which,  by  the 
terms  of  its  charter,  there  must  be  a  regulation  of  the  company  as  to  the 
mode  of  doing  it,  he  is  bound  to  make  inquiry  as  to  the  mode.  Apply- 
ing these  principles  to  the  case  before  us,  we  find  that  the  president  and 
cashier  are  the  persons  usually  employed  to  give  certificates  of  stock, 
and  that  the  former,  as  head  of  the  corporation,  is  the  appropriate 
person  to  give  the  certificate,  in  so  far  as  it  relates  to  the  membership 
of  the  shareholder,  and  that  the  cashier,  the  executive  hand  of  the 
corporation  as  to  its  financial  matters,  may  appropriately  certify 
to  the  pecuniary  interest  of  the  shareholder.  Mrs.  Pinson,  therefore, 
was  under  no  obligation  to  make  any  inquiry  as  to  the  power  of  these 
officers  to  sign  the  certificates  of  stock,  and  in  fact  their  actual  author- 
ity is  not  disputed.  On  looking  at  the  charter,  she  learned  that 
the  "mode  and  manner"  of  making  the  transfer  of  the  stock  was 
subject  to  the  regulation  of  the  company  by  its  by-laws,  but  she 
found  nothing  which  specifically  authorized  the  company  to  interfere 
with  the  power  of  disposing  of  his  stock  possessed  by  each  stockholder. 
The  president  and  directors  were  authorized  to  regulate  the  "mode 
and  manner"  of  the  transfer  of  stock.  This  did  not  include  the 
authority  to  prevent,  or  even  to  restrict,  the  power  of  disposition. 
If  this  authority  exists  at  all,  it  results  from  the  general  power  con- 
ferred in  the  charter  to  make  all  needful  rules  and  regulations  for  the 
management  and  control  of  the  business  of  the  corporation.  She 
did  not,  therefore,  have  notice  from  the  charter  that  there  would  be 
any  by-law  preventing  a  disposition  of  his  stock  by  a  debtor  to  the 
bank.  The  utmost  that  can  be  inferred  against  her  on  this  subject 
is,  that  as  there  must  be  some  mode  in  which  the  jus  disponendi  of 
the  shareholder  as  to  his  stock  must  be  exercised,  she  was  bound  to 
take  notice  that  there  was  a  regulation  on  this  subject.  She  was 
bound  only  to  know  as  to  the  "mode  and  manner"  of  the  transfer, 
and  this  information  was  conveyed  to  her  in  the  certificate  itself, 


510  LAW  AND  BUSINESS 

in  the  phrase  "  transferable  at  the  office,  in  person  or  by  attorney." 
Having  this  information  on  the  face  of  the  certificate  itself,  issued  by 
the  proper  officers  of  the  company,  she  was  not  bound  to  inquire 
further.  She  had  a  right  to  repose  confidence  in  the  terms  of  the 
certificate  of  the  stock.  That  the  form  in  which  certificates  are 
issued  is  material  and  binding  on  the  bank,  and  may  be  relied  on  by 
a  purchaser,  is  well  settled.  It  is  also  settled  that  the  statements 
of  such  certificates  as  to  the  manner  of  their  transfer  constitute  the 
regulation  on  that  subject.  Lanier  v.  Bank,  n  Wall.  369;  Vansands 
v.  Middlesex  County  Bank,  26  Conn.  144.  The  power  of  a  shareholder 
to  dispose  of  his  stock  is  not  derived  from  the  bank.  It  is  inherent 
in  him  as  a  part  of  his  proprietorship.  The  bank's  power  is  simply 
to  regulate  the  mode  of  its  exercise.  When  this  certificate  said  that 
Crump  was  entitled  to  the  named  shares  of  stock,  and  that  they  were 
" transferable  at  the  office,  in  person  or  by  attorney,"  it  asserted  the 
right  of  a  purchaser  to  have  the  transfer  made  at  that  place,  and  it 
asserted  no  more.  The  certificate  did  not  say  even  that  there  were 
by-laws  of  the  bank  according  to  which  the  transfer  was  to  be  made, 
as  is  usual  in  such  certificates.  It  contained  no  intimation  on  its 
face  of  any  restriction  on  the  power  of  transfer,  nor  did  it  refer  to  any 
other  instrument  in  which  such  restriction  might  be  found.  The 
assignability  of  these  certificates  resulted  from  a  right  of  the  share- 
holder to  dispose  of  his  property.  The  ease  with  which  assignments 
could  be  made  was  an  essential  element  in  the  value  of  the  shares, 
enhancing  it  both  to  the  shareholder  and  the  bank.  It  is  true,  they 
are  not  commercial  paper;  but,  as  it  was  said  in  Lanier  v.  Bank, 
ii  Wall.  369,  they  approximate  it  as  near  as  practicable. 

The  bank  having  adopted  a  form,  in  this  case,  which  asserted  the 
right  to  transfer  with  no  other  limitation  on  it  than  that  it  should  be 
done  at  the  office  of  the  bank,  and  with  no  reference  to  the  existence 
of  any  by-law  or  regulation  which  might  impose  other  restrictions, 
good  faith  and  fair  dealing  require  that  the  purchaser  in  good  faith, 
acting  according  to  the  terms  of  the  certificate,,  should  be  protected. 
But  there  is  another  ground  equally  conclusive  against  the  right  of 
the  bank  to  assert  this  lien  against  Mrs.  Pinson.  The  by-law  under 
which  the  lien  is  asserted  directed  that  notice  of  the  lien  should  be 
given  by  the  certificate.  This  was  not  done.  It  is  not  claimed  that 
this  certificate,  as  it  was  phrased,  was  unauthorized;  in  fact,  it  was 
admitted  in  the  argument  that  all  the  certificates  ever  issued  by  the 
bank  were  in  the  same  form.  This  would  therefore  be  held  to  have 


MANAGEMENT  OF  THE  BUSINESS  UNIT  511 

been  done  with  the  consent  of  the  directors,  who,  being  stockholders, 
received  their  certificates  framed  as  these  were.  The  provision  in 
the  by-law  requiring  the  notice  must  be  held  to  mean  that  the  lien 
would  not  be  asserted  against  a  person  not  having  this  notice.  The 
by-law  was  binding  on  the  company  and  its  members  as  a  legislative 
act.  The  company  cannot  be  heard  to  assert  a  claim  in  violation  of 
its  own  by-law,  especially  when  the  violation  is  in  a  matter  essential 
to  the  protection  of  the  party  against  whom  the  claim  is  asserted. 
Moreover,  the  power  to  make  the  by-law  was  not  by  the  charter 
vested  in  the  shareholders,  but  in  the  directory.  The  board  could 
therefore  waive  or  repeal  it.  Angell  and  Ames  on  Corporations, 
section  354.  There  was  here  both  a  waiver  and  a  repeal,  so  far  as  the 
purchasers  of  the  stock  were  concerned.  The  waiver  was  in  the  issu- 
ance of  these  particular  certificates  with  the  omission  of  the  provision 
as  to  the  notice.  The  repeal  arose  from  the  uniform  course  pursued 
by  the  bank  in  issuing  certificates  with  the  omission.  Corporations 
are  not  permitted  to  pass  by-laws  in  secret,  and  by  their  conduct 
to  the  outside  world  induce  a  belief  in  their  non-existence.  This 
uniform  conduct,  at  least  as  to  all  who  are  not  members  of  the  corpora- 
tion, will  be  held  as  making  a  by-law  repealing  the  other.  By-laws 
need  not  be  in  writing.  They  may  be  adopted  as  well  by  the  com- 
pany's conduct,  and  the  acts  and  conduct  of  its  officers,  as  by  an 
express  vote  or  an  adoption  in  a  meeting.  Field  on  Corporations, 
section  305. 

We  therefore  conclude  that  the  corporation  had  no  lien  as  against 
the  rights  of  Mrs.  Pinson.  Probably  the  lien  exists  as  against  the 
Crumps,  and  for  this  reason  the  judgment  will  be  reversed,  so  that 
the  recovery  of  Mrs.  Pinson  may  be  limited  to  the  amount  of  the  debt 
and  interest  in  the  reasonable  attorney's  fees  stipulated  to  be  paid 
in  the  contract  of  loan.  And  the  defendant  in  error  agreeing  to 
remit  all  but  the  principal  and  interest  of  the  debt,  and  that  judgment 
should  be  entered  for  that  amount,  it  is  ordered  accordingly. 

QUESTIONS 

i.  The  D  Company  was  incorporated  with  a  capital  stock  of  $100,000,  to 
be  divided  into  a  1,000  shares  of  the  par  value  of  $100  a  share.  Seven 
hundred  and  fifty  shares  of  the  authorized  stock  were  subscribed  and 
paid  for.  The  corporation,  needing  additional  working  capital,  adopted 
a  by-law  authorizing  the  directors  to  issue  the  balance  of  the  stock  as 
preferred  stock.  Certain  of  the  stockholders  of  the  corporation  ask 


512  LAW  AND  BUSINESS 

that  the  corporation  be  enjoined  from  issuing  this  stock  as  preferred 
stock.     What  decision  ? 

2.  In  the  foregoing  case,  the  corporation  adopted  a  by-law  providing  for 
assessments  upon  the  common  stock  in  addition  to  the  par  value  already 
paid.     This  is  an  action  by  the  corporation  against  S  on  an  assessment 
made  under  the  authority  of  the  by-law  in  question.     S  contends  that 
the  by-law  is  invalid.     What  decision  ? 

3.  A,  B,  and  C  are  members  of  a  trading  partnership.     They  adopt  a  by-law 
which  provides  that  no  negotiable  paper  shall  be  issued  in  the  firm 
name  without  the  concurrence  of  all  the  partners.    A,  in  violation  of 
this  by-law,  issues  a  promissory  note  in  the  firm  name.    H,  a  holder 
in  due  course  of  the  instrument,  brings  an  action  on  it  against  the  firm. 
What  decision  ? 

4.  WTiat  is  the  effect  of  a  regularly  adopted  by-law  on  members  of  the 
organization  ?  on  third  persons  who  deal  with  the  organization  ? 


MILLER  v.  EWER 
27  Maine  Reports  509  (1847) 

SHEPLEY,  J.  This  is  a  writ  of  entry  brought  to  recover  a  tract 
of  land  in  the  town  of  Bluehill,  upon  which  a  granite  store  has  been 
erected.  The  demandants  derive  their  title  from  the  Bluehill  Granite 
Co.,  and  introduce  a  conveyance  by  deed  of  mortgage,  of  a  tract  of 
land,  including  the  premises  demanded,  purporting  to  be  executed 
by  that  company  on  April  6,  1837,  by  its  president,  John  S.  Labaugh, 
and  its  secretary,  David  E.  Wheeler,  to  Matthew  C.  St.  John,  in 
trust  for  the  benefit  of  certain  persons  therein  named.  And  con- 
veyances from  the  trustee  and  the  cestis  que  trust,  assigning  that 
mortgage  to  William  I.  Tenney.  Also  copies  of  judgment  recovered 
by  William  I.  Tenney  against  that  company,  and  of  an  execution  issued 
thereon,  and  of  the  return  of  an  officer  upon  it,  showing  a  seizure 
and  sale  of  the  company's  right  to  redeem  that  mortgage  to  William 
I.  Tenney;  and  a  deed  of  the  same  from  the  officer  to  him  on  June  2, 
1840.  And  a  deed  from  William  I.  Tenney  to  the  demandants, 
made  on  June  29,  1843. 

To  prove  that  the  president  and  secretary  of  that  company 
were  authorized  to  make  and  execute  the  mortgage  to  Matthew  C. 
St.  John,  the  records  of  the  company  were  introduced;  and  the  charter 
granted  by  an  act  of  this  state,  approved  February  29,  1836.  The 
records  of  the  board  of  directors  were  also  introduced.  It  appears 
from  those  records,  that  a  meeting  of  the  corporators  was  called  for 


MANAGEMENT  OF  THE  BUSINESS  UNIT  513 

the  organization  of  the  corporation,  under  its  charter  in  the  city  of 
New  York,  and  that  the  charter  was  there  accepted,  and  the  officers 
of  the  corporation,  president,  secretary,  and  directors  were  chosen. 
And  at  a  meeting  of  those  directors,  held  in  that  city  on  April  6,  1837, 
the  president  and  secretary  thus  chosen,  were  authorized  by  vote  to 
make  and  execute  the  conveyance  in  mortgage  to  Matthew  C.  St. 
John.  There  is  no  proof,  that  any  meeting  for  the  organization  of 
the  company,  or  for  the  choice  of  its  officers,  has  ever  been  holden  in 
this  state.  There  is  proof  that  the  company,  by  a  person  acting  as 
its  agent,  transacted  business  in  this  state,  during  the  years  1836, 
1837,  and  1838. 

It  is  contended,  that  the  existence  of  the  corporation  is  sufficiently 
proved  by  the  introduction  of  its  charter,  and  by  the  testimony, 
showing  the  transaction  of  business  under  it. 

If  this  be  admitted,  the  demandants  must  proceed  further,  and 
show  that  the  persons  who  executed  the  conveyance  in  mortgage, 
were  legally  authorized  to  do  it.  If  directors  of  the  corporation, 
legally  chosen,  might  transact  business  as  such  by  vote  of  the  board, 
at  a  meeting  held  in  another  state,  and  might  authorize  persons  to 
execute  a  conveyance  of  real  estate,  yet  it  would  be  necessary,  to  show 
that  such  persons  were  legally  chosen  directors,  before  any  conveyance 
made  by  their  direction  could  be  considered  as  legally  made. 

The  demandants  must  recover  upon  the  strength  of  their  own 
title,  not  because  the  tenant  does  not  exhibit  a  legal  title;  and  their 
right  to  recover  will  depend  upon  a  decision  of  the  question,  whether 
the  corporation  has  authorized  any  board  of  directors  or  other  persons 
to  make  that  conveyance  of  its  estate. 

There  are  a  variety  of  corporations.  It  will  only  be  necessary 
on  this  occasion,  to  speak  of  one  class  of  them,  corporations  aggregate, 
composed  of  natural  persons.  It  is  often  stated  in  the  books,  that 
such  a  corporation  is  created  by  its  charter.  This  is  not  precisely 
correct.  The  charter  only  confers  the  power  of  life,  or  the  right  to 
come  into  existence,  and  provides  the  instruments  by  which  it  may 
become  an  artificial  being,  or  acting  entity.  Such  a  corporation  has 
been  well  defined  to  be  an  artificial  being,  invisible,  intangible,  and 
existing  only  in  contemplation  of  law.  The  instruments  provided  to 
bring  the  artificial  being  into  life  and  active  operation  are  the  persons 
named  in  the  charter,  and  those  who,  by  virtue  of  its  provisions,  may 
become  associated  with  them.  Those  persons  or  corporators,  as 
natural  persons,  have  no  such  power.  The  charter  confers  upon 


514  LAW  AND  BUSINESS 

them  a  new  faculty  for  this  purpose;  a  faculty  which  they  can  have 
only  by  virtue  of  the  law,  which  confers  it.  That  law  is  inoperative 
beyond  the  bounds  of  the  legislative  power,  by  which  it  is  enacted. 
As  the  corporate  faculty  cannot  accompany  the  natural  persons 
beyond  the  bounds  of  the  sovereignty,  which  confers  it;  and  they 
cannot  possess  or  exercise  it  there;  they  can  have  no  more  power  there 
to  make  the  artificial  being  act  than  other  persons  not  named 
or  associated  as  corporators.  Any  attempt  to  exercise  such  a  faculty 
there,  is  merely  an  usurpation  of  authority  by  persons  destitute  of  it, 
and  acting  without  any  legal  capacity  to  act  in  that  manner.  It 
follows  that  all  votes  and  proceedings  of  persons  professing  to  act 
in  the  capacity  of  corporators,  when  assembled  without  the  bounds 
of  the  sovereignty  granting  the  charter,  are  wholly  void. 

This  is  a  familiar  principle,  when  applied  in  analogous  cases  to 
persons,  upon  whom  the  law  has  conferred  some  power  or  faculty, 
which,  as  natural  persons,  they  do  not  possess. 

The  power  conferred  by  law  upon  executors  and  administrators, 
cannot  accompany  their  persons  beyond  the  bounds  of  the  sovereignty, 
which  has  conferred  it.  Story  has  collected  numerous  cases,  in  note 
under  section  512,  in  his  treatise  upon  the  Conflict  of  Laws,  proving 
the  doctrine  to  be  established  both  in  England  and  in  this  country. 

The  same  doctrine  generally  prevails  in  this  country,  while  it 
does  not  in  England,  respecting  the  powers  of  assignees  under  bank- 
rupt and  insolvent  laws.  The  doctrine  is  stated  and  discussed  and 
the  cases  are  collected  by  Story  in  his  treatise  on  the  Conflict  of  Laws, 
chap.  9,  sees.  405  to  417. 

If  the  artificial  being,  called  the  Bluehill  Granite  Co.,  may  be 
considered  as  having  existence  and  active  life  in  this  state,  by  proof 
of  its  acts  within  her  limits,  it  will  be  still  true  that  it  cannot  have 
existence  without  her  limits  and  of  course  cannot  make  choice  of  any 
officers  or  agents  there.  It  may  maintain  a  suit  without  those 
limits,  but  that  does  not  imply  its  existence  or  presence  there. 
It  may  also  contract  without  those  limits.  Being  within  them,  it  may, 
acting  per  se,  by  vote  transmitted  elsewhere,  propose  a  contract  or 
accept  one  previously  offered.  And  it  may,  by  an  agent  or  agents 
duly  constituted,  act  and  contract  beyond  those  limits.  But  it  can 
neither  exist,  nor  act  per  se,  without  them,  except  by  the  assistance 
of  its  officers  or  agents  duly  elected  or  appointed  within  them. 

The  constitution  and  powers  of  such  corporations  were  perhaps 
more  thoroughly  discussed  and  fully  considered  than  ever  before  by 


MANAGEMENT  OF  THE  BUSINESS  UNIT  515 

any  judicial  tribunal,  in  the  case  of  the  Bank  of  Augusta  v.  Earle, 
13  Peters,  519.  C.  J.  TANEY,  delivering  the  opinion  of  the  court, 
says,  "  It  is  very  true,  that  a  corporation  can  have  no  legal  existence 
out  of  the  boundaries  of  the  sovereignty  by  which  it  is  created. 
It  exists  only  in  contemplation  of  law;  and  where  the  law  ceases  to 
operate  and  is  no  longer  obligatory,  the  corporation  can  have  no 
existence.  It  must  dwell  in  the  place  of  its  creation  and  cannot 
migrate  to  another  sovereignty." 

The  cases  of  McCall  v.  The  Byram  Manufacturing  Co.,  6  Conn.  R. 
428,  and  of  Copp  v.  Lamb,  3  Fairf.  314,  are  relied  upon  as  deciding, 
that  corporations  whose  charters  were  granted  by  one  state,  could 
hold  meetings,  pass  votes,  and  exercise  powers  in  another  state. 

The  question  presented  in  the  former  case  was  whether  the 
secretary  of  a  corporation  was  legally  appointed  .by  the  directors  at 
a  meeting  held  by  them  in  the  city  of  New  York.  The  charter  had 
been  granted  by  the  state  of  Connecticut.  The  decision  was  in  the 
affirmative. 

The  directors  of  a  corporation  are  not  a  corporate  body,  are,  when 
acting  as  a  board,  but  a  board  of  officers  or  agents,  and  they  may  exer- 
cise their  powers  as  agents  beyond  the  bounds,  where  the  corporation 
exists.  It  did  indeed  appear  in  that  case,  that  all  the  meetings  of 
the  stockholders,  and  of  the  directors,  were  held  in  the  city  of  New 
York,  but  the  capacity  of  the  stockholders  to  act  there,  does  not 
appear  to  have  been  examined  or  discussed. 

If  there  were  no  legally  existing  mortgage,  there  could  be  no 
legal  sale  at  auction  of  the  right  of  the  corporation  to  redeem  it. 
In  such  case  the  execution  could  only  be  satisfied  from  the  real  estate 
of  the  corporation  by  a  levy  and  appraisal.  Tenney  obtained  no 
legal  title  by  that  seizure  and  sale,  and  he  could  convey  none  to 
the  demandants. 

Under  such  circumstances  it  will  not  be  necessary  to  consider 
whether  the  tenant  obtained  any  title  whatever  by  the  proceedings 
stated  in  the  testimony. 

Demandants  nonsuit. 

QUESTIONS 

1.  Do  you  conclude  from  the  decision  in  this  case  that  a  corporation 
organized  in  one  state  can  do  no  business  in  another  state?     If  not, 
precisely  what  does  the  case  decide  ? 

2.  Can  the  directors  of  a  corporation,  meeting  in  a  foreign  state,  bind 
the  corporation  by  their  action  ? 


5*6  LAW  AND  BUSINESS 

3.  Is  the  rule  of  the  principal  case  applicable  to  meetings  of  partners  ? 

4.  The  directors  of  a  corporation  pass  a  resolution,  authorizing  the  execution 
of  a  mortgage  on  corporate  property  to  C.     By  a  provision  in  the  charter 
of  the  corporation  the  mortgage  does  not  become  binding  upon  the 
corporation  until  it  has  been  ratified  by  the  stockholders.     A  majority 
of  the  stockholders  individually  and  informally  assent  to  the  resolution. 
The  directors  execute  and  deliver  the  mortgage  deed  to  C.     In  proceed- 
ings to  foreclose   the  mortgage,   the   corporation  contends  that   the 
mortgage  was  never  legally  executed.    What  decision  ? 


GILCHRIST  v.  COLLOPY 
119  Kentucky  Reports  no  (1904) 

BARKER  J.  The  Newport  &  Covington  Bridge  Co.  owns  and 
operates  a  bridge  6*ver  the  Licking  River,  connecting  the  two  cities 
of  Newport  and  Covington.  The  stock  of  the  corporation  consists 
of  1,000  shares  of  the  par  value  of  twenty-five  dollars  each,  the  whole 
owned  by  the  two  municipal  corporations  equally.  By  the  charter, 
the  affairs  of  the  corporation  are  to  be  managed  by  five  directors, 
chosen  annually  by  the  shareholders  on  the  first  Monday  in  June. 
There  seems  to  have  been  a  working  agreement  between  the  cities 
that  in  alternate  years  one  should  elect  three,  and  the  other  two,  of 
the  directors. 

On  the  the  first  Monday  in  June,  1903,  the  mayor  of  Covington 
attended  at  the  office  of  the  bridge  corporation,  and  being  properly 
authorized  so  to  do,  voted  the  stock  of  the  city  of  Covington  for  the 
appellees  as  directors  for  the  ensuing  year.  The  stock  of  the  city  of 
Newport  was  not  represented  at  the  meeting.  The  appellees  qualified 
by  taking  the  oath  .of  office,  and  presented  themselves  to  the  corpora- 
tion for  installation,  which  was  refused  on  the  ground  that  there  had 
been  no  legal  election,  and  therefore  they  were  not  directors.  Where- 
upon they  instituted  this  action  in  equity  against  appellants  for  the 
injunction  restraining  them  from  preventing  appellees  exercising 
their  duties  as  directors.  Without  further  statement  of  the  pleadings 
in  this  case,  it  is  sufficient  to  say  that  they  present  for  adjudication 
the  following  questions:  (i)  Can  less  than  a  majority  of  the  share- 
holders of  a  private  corporation,  upon  the  regular  charter  day,  hold 
a  valid  election  for  directors  ?  (2)  Can  persons  claiming  to  be  elected 
directors  at  such  meeting,  upon  the  refusal  of  the  corporation  to  permit 
them  to  be  installed,  be  placed  in  office  in  an  equity  action  for  an 


MANAGEMENT  OF  THE  BUSINESS  UNIT  517 

injunction  ?  (3)  Was  the  election  void  because  only  two  of  the  five 
directors  were  elected  ?  Of  these  in  their  order. 

There  is  no  question  in  this  action  as  to  sufficiency  of  notice  of 
election,  it  being  held  on  the  day  prescribed  in  the  charter.  Only 
half  of  the  stock  was  represented.  Some  confusion  has  arisen  on  the 
subject  in  hand  by  a  failure  to  distinguish  those  cases  which  turn 
upon  statutes  or  by-laws  which  require  the  presence  and  participa- 
tion of  the  holders  of  a  majority  in  value  of  the  shares  in  order  to 
constitute  a  legal  quorum  for  the  purpose  of  transacting  the  business 
of  the  corporation,  from  those  cases  which  turn  upon  the  common- 
law  regulation  of  the  matter.  As  we  have  no  statute  bearing  upon 
this  subject,  and  there  is  no  provision  in  the  charter  of  the  by-laws 
of  the  corporation  prescribing  what  proportion  of  the  shares  constitute 
a  quorum,  we  must,  of  necessity,  rely  upon  the  common-law  rule. 

In  Morawetz  on  Private  Corporations  (2d  ed.),  section  76,  the  rule 
is  thus  stated:  "The  majority  of  a  corporation  means  that  portion  of 
the  shareholders  present  at  a  general  meeting  who  are  entitled  to  con- 
trol the  corporation  by  their  votes.  It  is  not  necessary  that  the  major- 
ity of  all  the  shareholders  or  a  great  part  of  its  shares  be  present  at 
a  meeting  in  order  that  the  resolutions  of  the  meeting  shall  be  binding 
on  the  corporation.  In  the  absence  of  an  express  provision  to  the 
contrary,  the  rule  is  that  such  of  its  shareholders  as  actually  assemble 
at  a  properly  convened  meeting  constitute  a  quorum  for  the  transac- 
tion of  business,  and  a  majority  of  that  quorum  have  authority  to 
represent  the  corporation."  Kent,  in  his  Commentaries,  Volume  2, 
page  293,  says:  "There  is  a  distinction  taken  between  a  corporate 
act  to  be  done  by  a  select  and  definite  body,  as  by  a  board  of  directors, 
and  one  to  be  performed  by  the  constituent  members.  In  the  latter 
case,  a  majority  of  those  who  appear  may  act;  but  in  the  former,  a 
majority  of  the  definite  body  must  be  present,  and  then  a  majority  of 
the  quorum  may  decide.  This  is  the  general  rule  on  the  subject,  and, 
if  any  corporation  has  a  different  modification  of  the  expression  of 
the  binding  will  of  the  corporation,  it  arises  from  the  special  provision 
of  the  act  or  charter  of  incorporation."  Cook,  in  his  work  on  Corpora- 
tions (4th  ed.),  section  607,  says:  "The  question  has  arisen  whether 
the  meeting  can  be  held  and  business  transacted  when  the  majority 
in  interest  of  the  stockholders  are  not  present.  But  the  law  is  clear 
that  the  stockholders  who  attend  a  duly  called  stockholders'  meeting 
may  transact  the  business  of  the  meeting  although  a  majority  in 
interest,  or  in  numbers,  of  the  stockholders  are  not  present " 


Si8  LAW  AND  BUSINESS 

The  case  of  Brown  v.  The  Pacific  Mail  Steamship  Co.,  5  Blatchf., 
525,  Fed.  Cas.,  No.  2025,  was  an  action  instituted  by  the  stock- 
holders of  a  majority  of  a  corporation  to  prevent  an  election  for 
directors  to  take  place  until  certain  questions  relating  to  the  right 
to  vote  the  stock  could  be  settled,  it  being  alleged  that  at  the 
approaching  election  the  stockholders  who  constituted  a  minority 
had  entered  into  a  conspiracy  to  obtain  an  injunction  against  the 
holders  of  the  majority  of  the  stock,  preventing  them  from  voting, 
and  before  the  matter  of  injunction  could  be  adjudicated  the  minority 
would  elect  directors  and  secure  control  of  the  corporation.  It 
became  necessary  for  the  court  to  consider  whether  such  an  election 
would  be  valid.  If  valid,  the  holders  of  the  majority  of  the  stock 
would  be  injured;  if  invalid,  they  would  have  no  ground  for  injunction. 
The  court  said : 

Certainly,  if  there  ever  was  a  case  for  relief  of  some  kind  by  injunction, 
this  case  is  one  of  that  kind,  to  prevent  the  commission  of  so  great  and 
admitted  a  wrong,  wholly  undefended.  It  is  a  case  in  which  there  would 
be  no  adequate  remedy  at  law,  because  the  law,  as  settled  by  the  Supreme 
Court  of  the  United  States,  in  regard  to  the  jurisdiction,  in  suits  in  equity, 
of  the  courts  of  the  United  States,  in  view  of  the  statute  which  declares 
that  there  shall  be  no  remedy  in  equity  where  there  is  a  plain,  adequate, 
and  complete  remedy  at  law,  is  that  the  remedy  at  law  must  be  as  efficient 
to  the  ends  of  justice,  and  its  complete  and  prompt  administration,  as  the 
remedy  in  equity.  Now,  in  the  present  case,  the  election  taking  place 
under  these  circumstances,  which  it  is  thus  admitted  will  be  the  circum- 
stances of  the  case,  would  be  perfectly  legal,  although  accomplished  in  this 
way  by  a  minority  of  the  votes.  There  would  be  no  ground,  so  far  as  I  am 
able  to  perceive,  for  setting  aside  the  election,  because  an  injunction,  obtained 
from  a  proper  court  having  jurisdiction,  had  excluded  certain  persons 
from  voting. 

The  learned  judge  thus  fully  recognized  that  a  minority  in  value  of 
the  shares  of  the  stock  of  a  corporation  could  hold  a  valid  election  for 
directors,  although  the  majority  were  kept  from  participation  therein 
by  the  wrongful  acts  of  the  minority.  The  principle  has  not  been 
carried  so  far  in  any  other  case  with  which  we  are  acquainted. 

In  the  case  of  Morrill  v.  Little  Falls  Manufacturing  Co.  (Sup.  St. 
of  Minn.)  55  N.W.,  547,  21  L.R.A.,  174,  it  is  said: 

The  second  objection  [a  want  of  a  majority  of  the  stockholders  at  the 
meeting]  is  equally  untenable..  Where  the  charter  and  by-laws  of  a  corpo- 
ration are  silent  on  the  subject,  the  common-law  rule  is  that  such  of  the 


MANAGEMENT  OF  THE  BUSINESS  UNIT  519 

shareholders  as  actually  assemble  at  a  properly  convened  meeting,  although 
a  minority  of  the  whole  number,  and  representing  only  a  minority  of  the 
stock,  constitute  a  quorum  for  the  transaction  of  business,  and  may  express 
the  corporate  will,  and  the  body  will  be  bound  by  their  action.  [Omitting 
authorities  cited.]  The  contention  of  the  appellants,  that  this  rule  applies 
only  to  such  organizations  as  towns,  churches,  and  the  like,  and  not  to  stock 
corporations,  finds  no  support  either  in  reason  or  authority.  The  correct 
distinction  is  between  a  corporate  act  to  be  done  by  a  select  body,  of  a 
definite  number,  as,  for  example,  a  board  of  directors  or  trustees,  and  one 
to  be  performed  by  the  constituent  members  of  the  corporation.  In  the 
latter  case,  a  majority  of  those  who  appear  may  act. 

The  reason  for  the  common-law  rule  is  obvious.  If  it  were  otherwise, 
the  affairs  of  the  corporation,  through  either  the  negligence  <of  the 
malevolence  of  a  majority  of  the  shareholders,  might  be  allowed  to 
go  to  ruin.  We  know  of  no  power  by  which  the  shareholders  can  be 
forced  to  attend  the  meeting  of  the  corporation,  but  the  law  affords 
a  sufficient  remedy  for  this  danger  by  placing  the  control  of  the  prop- 
erty in  the  hands  of  those  shareholders  who  are  sufficiently  interested 
in  its  affairs  to  attend  the  corporate  meetings.  If  the  rule  we  have 
announced  did  not  prevail,  a  designing  majority  of  the  shareholders, 
who  had  obtained  possession  of  the  corporation  by  electing  the  direc- 
tors, could  retain  the  management  indefinitely,  no  matter  how 
injurious  that  management  might  be  to  its  affairs,  by  simply  abstain- 
ing from  its  corporate  meetings. 

We  are  not  impressed  with  the  suggestion  that  the  election  was 
void  for  the  reason  that  only  two  directors  were  elected,  instead  of 
five.  The  charter  provides  that  five  directors  shall  be  elected  annu- 
ally, and  that  they  shall  hold  over  until  their  successors  are  elected. 
As  said  before,  there  seems  to  have  been  a  working  agreement  between 
the  two  cities,  who  owned  the  stock  as  to  which  should  elect  two, 
and  which  should  elect  three,  of  the  directors  in  any  one  year.  In 
1903  it  was  Covington's  time  to  elect  only  two  directors,  and  in  good 
faith  it  carried  out  that  agreement,  although  accomplished  in  this 
way  by  a  minority  of  the  votes.  There  it  might  have  elected  the 
five,  in  the  absence  of  the  stockholders  of  the  city  of  Newport  from 
the  meeting.  The  agreement  between  the  cities  alluded  to  is  essential 
to  harmony  between  them,  each  owning  one-half  of  the  stock,  and 
there  being  five  directors  to  be  elected.  It  is  one  so  absolutely  prac- 
tical and  so  eminently  fair  that  we  think  it  should  be  upheld. 

Perceiving  no  error  in  the  record,  the  judgment  is  affirmed. 


520  LAW  AND  BUSINESS 

QUESTIONS 

1.  What  rule  does  this  case  lay  down  with  reference  to  the  sufficiency  of 
corporate  action  ?     Does  the  same  rule  apply  to  the  sufficiency  of  actions 
by  directors  ? 

2.  How  many  votes  is  a  stockholder  in  a  corporation  entitled  to?     Does 
the  voting  right  of  a  partner  depend  upon  his  interest  in  the  partnership  ? 

3.  What  persons  are  entitled  to  vote  at  corporate  meetings  ?     May  a 
trustee  of  stock  vote?     May  a  pledgee  of  stock?     May  a  transferee 
whose  name  has  not  been  entered  upon  the  books  of  the  corporation  ? 

4.  What  is  meant  by  cumulative  voting  of  stock  ?     What  is  the  purpose 
of  cumulative  voting?     Is  a  stockholder,  in  the  absence  of  express 
authorization,  entitled  to  cumulate  his  votes  ? 

5.  Is  a  stockholder  entitled  to  vote  by  proxy?     Can  the  corporation, 
in  $ie  absence  of  express  authority,  confer  the  privilege  of  voting  by 
proxy  on  stockholders  by  a  by-law  ? 

6.  What  is  the  doctrine  of  Smith  v.  San  Francisco  Railroad  Co.,  supra, 
page  415,  with  reference  to  the  voting  privilege? 

FOSTER  v.  WHITE 
86  Alabama  Reports  467  (1888) 

In  this  case,  an  application  was  made  on  the  thirtieth  of  January, 
1889,  in  the  name  of  the  state,  on  the  relation  of  Joel  White,  for  a 
mandamus  to  T.  Gardner  Foster,  as  secretary  and  treasurer  of  the 
Montgomery  Gas-Light  Co.,  or  the  Montgomery  Light  Company,  a 
private  corporation,  requiring  him  to  allow  the  relator,  who  was  a 
stockholder  in  said  corporation,  to  inspect  and  examine  its  books, 
records,  and  papers.  The  petition  alleged  that  demand  for  an  inspec- 
tion 'of  the  books,  etc.,  was  made  by  the  petitioner,  as  a  stockholder, 
through  P.  C.  Massie,  "his  attorney  in  fact,  duly  and  legally  author- 
ized to  that  end";  and  that  "it  was  in  all  respects,  as  to  time,  place, 
and  circumstances,  reasonable  and  proper,  having  been  made  during 
the  regular  office  hours  of  said  Foster,  at  the  office  of  said  corporation, 
where  its  books  and  records  were  kept,  and  at  time  when  they  were 
not  being  used  by  any  other  person."  The  defendant  demurred  to 
the  petition  (i)  because  it  showed  that  the  demand  was  not  made 
by  the  stockholder  himself,  and  it  was  not  shown  that  he  was  person- 
ally incapacitated;  (2)  because  it  did  not  allege  or  show  that  the 
demand  was  made  for  any  lawful  purpose;  nor  (3)  that  any  particular 
purpose  or  reason  was  specified.  He  also  filed  an  answer,  admitting 
his  refusal  to  allow  an  inspection  as  demanded  in  the  absence  of 


MANAGEMENT  OF  THE  BUSINESS  UNIT  521 

instructions  from  the  president  of  the  corporation,  who  was  absent 
from  the  city  at  the  time;  and  he  set  up  a  resolution  of  the  board  of 
directors,  adopted  after  the  demand  and  refusal  in  this  case,  instruct- 
ing him  to  refuse  an  inspection  of  the  books  "  to  any  agent  of  a  stock- 
holder, unless  it  is  made  apparent  to  him  that  the  stockholder  is 
physically  unable  to  make  the  examination  in  person."  The  court 
overruled  the  demurrer,  and  granted  a  peremptory  mandamus;  and 
this  judgment  is  here  assigned  as  error. 

CLOPTON,  J.  Section  1677,  Code  1886,  declares:  "The  stock- 
holders of  all  private  corporations  have  the  right  of  access  to,  inspec- 
tion and  examination  of,  the  books,  records,  and  papers  of  the  cor- 
poration, at  reasonable  and  proper  times."  As  we  do  not  concur  in 
the  proposition  that  the  statute  is  merely  declaratory  of  the  common 
law,  it  becomes  unnecessary  to  consider  the  character  and  extent  of 
the  right  of  a  shareholder,  in  the  absence  of  statutory  regulations,  to 
inspect  and  examine  the  books  and  records  of  the  corporation  of  which 
he  is  a  member.  The  statute  was  enacted  in  view  of  the  restrictions 
and  limitations  placed  by  the  common  law  upon  the  exercise  of  the 
right;  and  the  purpose  is  to  protect  small  and  minority  stockholders 
against  the  power  of  the  majority,  and  against  the  mismanagement 
and  faithlessness  of  agents  and  officers  by  furnishing  mode  and  oppor- 
tunity to  ascertain,  establish,  and  maintain  their  rights,  and  to  intelli- 
gently perform  their  corporate  duties.  Its  terms  are  clear  and 
comprehensive,  and  afford  narrow  room  for  construction.  It  was 
intended  to  enlarge  and  disembarrass  the  exercise  of  the  right,  render- 
ing it  consistent  and  coextensive  with  the  stockholder's  right,  as  a 
common  owner  of  the  property,  books  and  papers  of  the  corporation, 
and  with  the  duties  and  obligations  of  the  managing  officers,  as  agents 
and  trustees,  the  only  express  limitation  is  that  the  right  shall  be 
exercised  at  reasonable  and  proper  times;  the  implied  limitation  is 
that  it  shall  not  be  exercised  from  idle  curiosity,  or  for  improper  or 
unlawful  purposes.  In  all  other  respects  the  statutory  right  is 
absolute.  The  shareholder  is  not  required  to  show  any  reason  or 
occasion  rendering  an  examination  opportune  and  proper,  or  a  definite 
or  legitimate  purpose.  The  custodian  of  the  books  and  papers  can- 
not question  or  inquire  into  his  motives  and  purposes.  If  he  has 
reason  to  believe  that  they  are  improper  or  illegitimate,  and  refuses 
the  inspection  on  this  ground,  he  assumes  the  burden  to  prove  them 
as  such.  If  it  be  said  this  construction  of  the  statute  places  it  in  the 
power  of  a  single  shareholder  to  greatly  injure  and  impede  the  business, 


522  LAW  AND  BUSINESS 

the  answer  is,  the  legislature  regarded  his  interests  in  the  successful 
promotion  of  the  objects  of  the  corporation  a  sufficient  protection 
against  unnecessary  or  injurious  interference.  The  statute  is  founded 
on  the  principle  that  the  shareholders  have  a  right  to  be  fully 
informed  as  to  the  condition  of  the  corporation,  the  manner  in  which 
its  affairs  are  conducted,  and  how  the  capital  to  which  they  have 
contributed  is  employed  and  managed. 

It  is  further  contended  that,  if  the  petitioner  has  the  right,  he 
cannot  exercise  it  by  an  agent.  The  right  may  be  regarded  as  per- 
sonal in  the  sense  that  only  a  stockholder  possesses  and  can  exercise 
it,  but  the  inspection  and  examination  may  be  made  by  another; 
otherwise  it  would  be  unavailing  in  many  instances.  In  Brewer  v- 
Watson,  71  Ala.  299,  it  was  held  that  an  attorney  at  law,  employed 
by  a  tax  collector  to  settle  his  accounts  with  the  auditor,  has  an 
interest  which  entitles  him  to  an  inspection  of  the  book  in  which  his 
client's  accounts  are  entered,  but  that  the  auditor  may  demand 
evidence  of  his  authority  and,  on  failure  or  refusal  to  furnish  it, 
decline  to  allow  the  inspection.  We  perceive  no  sufficient  reason 
why  the  same  principle  should  not  be  extended  to  an  attorney  in 
fact.  If  a  shareholder,  who  from  physical  infirmity,  or  want  of  skill 
and  knowledge,  or  other  cause,  is  unable  to  make  a  satisfactory  and 
intelligent  examination,  is  debarred  the  privilege  of  procuring  the  aid 
and  services  of  a  competent  accountant,  the  right  itself  would  be 
worthless — a  mockery.  In  State  v.  Oil  Works  Co.,  28  La.  Ann.  204, 
it  is  said:  "The  possession  of  the  right  in  question  would  be  futile, 
if  the  possessor  of  it,  through  lack  of  knowledge  necessary  to  exercise 
it,  were  debarred  the  right  of  procuring  in  his  behalf  the  services  of 
one  who  could  exercise  it." 

In  High,  Extr.  Rem.,  section  310,  speaking  of  mandamus  in  cases 
like  the  present,  it  is  said:  "The  writ  will  not  be  granted  merely  to 
enable  a  corporator  to  gratify  an  idle  curiosity  in  the  examination  of 
the  corporate  records,  but  lie  must  show  some  specific  interest  at 
stake  rendering  the  inspection  necessary,  or  some  beneficial  purpose 
for  which  the  examination  is  desired.  And  unless  there  is  some 
particular  matter  in  dispute  between  members  of  the  corporation,  or 
between  the  corporation  and  its  individual  members,  or  some  specific 
purpose  for  which  the  inspection  is  necessary,  mandamus  will  not 
lie,  since  the  courts  will  not  permit  the  use  of  the  writ  upon  merely 
speculative  grounds,  or  to  gratify  a  spirit  of  curiosity."  We  do  not 
assent  to  the  narrow  limits  to  which  the  jurisdiction  is  confined  in 


MANAGEMENT  OF  THE  BUSINESS  UNIT  523 

King  v.  Tailor's  Co.,  2  Barn.  &  Adol.  115;  that  is,  that  the  inspec- 
tion must  be  shown  to  be  necessary  in  reference  to  some  specific 
dispute  or  question  pending,  in  which  the  parties  have  an  interest. 
The  purpose  may  be  entirely  prospective,  and  an  examination  wniitd 
be  proper  and  legitimate,  if  the  object  is  to  obtain  information  as  to 
the  management  and  condition  of  the  affairs  of  the  corporation,  in 
order  to  enable  the  shareholder  to  determine  whether  any  and  what 
steps  are  necessary  to  establish  or  maintain  his  rights,  or  in  order  to 
enable  him  to  discharge  his  corporate  duties.  Huylar  v.  Cattle  Co., 
40  N  J.  Eq.  392,  2  Atl.  274.  Ordinarily,  a  mandamus  will  be  awarded 
whenever  an  inspection  and  examination  are  necessary,  for  any  reason,  to 
protect  the  interests  of  the  stockholders,  present  or  prospective,  and  is 
not  sought  from  idle  curiosity,  or  for  any  improper  or  unlawful  purpose. 
The  petition  merely  alleges  a  demand  to  inspect  at  a  reasonable  and 
proper  time,  and  a  refusal.  In  my  own  opinion,  the  petition  should 
prima  facie  show  a  clear  legal  right  to  the  examination  of  the  books  and 
records;  and  that  a  clear  legal  right  is  not  shown  unless  the  petition 
not  only  affirms  that  the  demand  was  made  at  a  reasonable  and 
proper  time,  but  also  negatives  that  the  inspection  is  sought  from  a 
spirit  of  curiosity,  or  for  an  improper  purpose,  thereby  making  the 
demand  without  both  the  express  and  implied  limitations  upon  the 
statutory  right.  I  am  apprehensive  that  to  establish  the  rule  that  a 
shareholder  may  demand  an  examination  of  the  books  and  papers  as 
often  as  he  so  pleases,  and,  on  being  refused,  obtain  a  writ  of  man- 
damus to  enforce  an  absolute  right,  without  being  required  to  exclude 
all  unfavorable  intendments  by  proper  averments  in  the  petition, 
which  must  be  verified,  will  prove  detrimental  to  the  interests  of 
corporations  and  their  stockholders.  But  the  majority  of  the 
members  of  the  court  competent  to  sit  in  this  case  hold  that  the 
statute  secures  to  the  stockholder  the  general  right .  to  examine 
the  books  at  any  and  all  reasonable  times.  They  hold,  further,  that, 
when  this  right  is  claimed  and  refused,  he  is  entitled  to  a  mandamus 
on  the  averments  that  he  is  a  stockholder  of  the  corporation,  that  he 
has  demanded  the  right  of  inspection,  that  the  time  was  reasonable 
and  proper,  and  that  the  right  was  denied  him.  These  averments 
being  made,  if  there  be  any  reason  why  the  right  should  not  be  granted 
this  is  a  matter  of  defense.  The  difference  between  us  relating  only 
to  a  matter  of  pleading,  and  not  to  any  principle  involved,  I  yield  to 
the  opinion  of  the  majority. 

The  result  is  an  affirmance  of  the  judgment. 


524  LAW  AND  BUSINESS 

QUESTIONS 

1.  What  was  the  extent  of  a  stockholder's  right  to  inspect  the  books  and 
records  of  his  corporation  under  the  common  law?     Why  has  the 
common-law  rule  on  the  subject  been  generally  modified  by  statute  ? 

2.  S,  a  stockholder  of  the  D  Company,  made  application  to  its  secretary 
for  permission  to  inspect  the  stock  and  transfer  books  of  the  corporation. 
He  wished  to  make  a  list  of  all  stockholders  for  the  purpose  of  finding 
out  whether  any  stock  of  the  corporation  was  for  sale.     The  secretary 
refused  him  permission  to  inspect  the  books  in  question.     What  are 
the  rights  of  S  against  the  corporation,  if  any,  under  a  statute  like  the 
one  referred  to  in  the  principal  case  ? 

3.  S  was  a  large  stockholder  and  a  director  in  the  D  Company.     He  bought 
ten  shares  of  stock  of  the  X  Company,  a  rival  of  the  D  Company,  and 
immediately  demanded  the  right  to  inspect  all  the  books  and  records 
of  the  X  Company.     Permission  to  do  so  was  denied  him.     He  brought 
mandamus  proceedings   to   secure  his   alleged   right.     What   decision 
under  a  statute  like  that  in  the  principal  case  ? 

4.  S  brings  mandamus  proceedings  under  the  statute  against  the  D  Com- 
pany to  establish  the  right  to  inspect  the  books  and  records  of  the 
corporation.     He  alleges  and  proves  that  he  is  a  stockholder  in  the  D 
Company;   that  he  demanded  the  permission  to  inspect  the  books  and 
records  of  the  corporation  at  a  reasonable  time;    and  that  permission 
to  do  so  was  denied  him.     What  decision  ? 

5.  Does  a  partner  have  the  right  to  inspect  the  books  and  records  of  the 
partnership  ?     What  is  the  extent  of  the  right  ?     How  can  he  establish 
the  right  in  case  his  copartners  deny  its  exercise  to  him  ? 

POOLEY  v.  WHITMORE 
57  Tennessee  Reports  629  (1873) 

BURTON,  J.  Pooley,  Barnum  &  Co.  sued  Edwin  Whitmore  &  Co. 
on  two  promissory  notes  for  one  hundred  and  eighty-five  dollars  each, 
made  by  W.  A.  Whitmore,  payable  at  six  and  nine  months  respec- 
tively, to  the  order  of  "Whitmore  Brothers"  and  indorsed  in  that 
name.  Whitmore  Brothers,  a  firm  composed  of  Edwin  Whitmore  and 
the  said  W.  A.  Whitmore,  were  partners  in  publishing  the  Public 
Ledger,  a  newspaper  in  the  city  of  Memphis,  and  also  conducted  a 
general  job-printing  office  in  that  city.  The  notes  in  suit,  however, 
were  drawn  and  indorsed  by  W.  A.  Whitmore  in  discharge  of  a  private 
debt  that  he  owed  to  one  Cannon.  Edwin  Whitmore  is  the  surviving 
partner  of  the  firm  and  puts  in  a  special  plea  of  non  est  factum,  and 
insists  that  the  firm  is  not  bound  to  pay,  on  the  ground  that  it  is  not 


MANAGEMENT  OF  THE  BUSINESS  UNIT  525 

a  partnership  debt.  Defendants  in  error  reply  that  they  are  bona 
fide  purchasers,  for  value,  of  the  note  in  due  course  of  trade,  and 
therefore  are  entitled  to  recover,  notwithstanding  the  wrong  or 
fraud  of  W.  A.  Whitmore  in  using  the  partnership  name  in  a  personal 
transaction. 

The  court  below  instructed  the  jury  that  "as  a  general  rule,  one 
partner  is  not  liable  for  the  act  of  another  partner  not  within  the 
scope  of  the  partnership  business.  That  if  one  partner  sign  a  prom- 
issory note  or  other  negotiable  paper  in  the  firm  name,  without  the 
knowledge  or  consent  of  the  other  partner,  and  for  a  matter  not 
within  the  scope  of  the  partnership  business,  the  other  partner  will 
not  be  liable  unless  he  ratify  the  act  or  unless  the  paper  gets  into  the 
hands  of  some  purchaser  before  maturity,  who  had  no  knowledge  or 
notice  of  the  consideration  between  the  original  parties,  and  who 
paid  a  valuable  consideration  for  the  paper.  That  such  a  person 
would  be  an  innocent  holder  for  value,  and  without  notice."  The 
foregoing  instructions  are  not  accurate  without  important  qualifica- 
tions, and  were  certainly  calculated,  as  we  think,  to  mislead  the  jury, 
in  view  of  the  facts  of  this  case. 

Every  member  of  an  ordinary  partnership  is  its  general  agent  for 
the  transaction  of  its  business  in  the  ordinary  way,  and  the  firm  is 
held  responsible  for  whatever  is  done  by  any  of  its  partners  when 
acting  for  the  firm,  within  the  limits  of  the  authority  conferred  by 
the  nature  of  the  business  it  carries  on.  Every  person  is  entitled  to 
assume  that  each  partner  is  empowered  to  do  for  the  firm  whatever 
is  necessary  for  the  transaction  of  its  business,  in  the  way  in  which 
that  business  is  ordinarily  carried  on  by  other  people.  But  no  person 
is  entitled  to  assume  that  any  partner  has  a  more  extensive  authority 
than  that  above  described.  It  will  be  observed  that  what  is  necessary 
to  carry  on  the  partnership  business  in  the  ordinary  way  is  made  the 
test  of  an  authority  when  no  actual  authority  or  ratification  can  be 
proved.  This  is  conformable  to  the  most  recent  and  carefully  con- 
sidered decisions,  but  by  adopting  it,  the  liability  of  a  firm  for  the 
acts  of  its  copartners  is  not  so  extensive  as  now,  lawyers  sometimes 
imagine. 

The  question  whether  a  given  act  can  or  cannot  be  necessary  to 
the  transaction  of  the  business  in  the  way  in  which  it  is  usually  carried 
on,  must  evidently  be  determined  by  the  nature  of  the  business,  and 
by  the  practice  of  persons  engaged  in  it.  Evidence  on  both  of  these 
points  is  necessarily  admissible,  and  as  readily  may  be  conceived,  an 


526  LAW  AND  BUSINESS 

act  which  is  necessary  for  the  prosecution  of  one  kind  of  business  may 
be  wholly  unnecessary  for  the  carrying  on  of  another  in  the  ordinary 
way,  consequently  no  answer  of  any  value  can  be  given  to  the  abstract 
question:  can  one  partner  bind  his  firm  by  such  an  act?  Unless 
having  regard  to  what  is  usual  in  business,  it  can  be  predicated  of  the 
act  in  question,  either  that  it  is  one  without  which  no  business  can 
be  carried  on,  or  that  it  is  one  which  is  not  necessary  for  carrying  on 
any  business  whatever.  There  are  obviously  very  few  acts  of  which 
such  an  affirmation  can  be  truly  made.  The  great  majority  of  acts 
which  give  rise  to  doubt  are  those  which  are  necessary  in  one  business, 
and  not  in  another.  Take,  for  example,  negotiable  instruments.  It 
may  be  necessary  for  one  member  of  a  firm  of  bankers  to  draw, 
accept,  or  indorse  a  bill  of  exchange  on  behalf  of  the  firm,  and 
to  require  that  each  member  should  put  his  name  to  it  would  be 
ridiculous;  but  it  by  no  means  follows,  nor  is  it  in  fact  true,  that 
there  is  any  necessity  for  one  of  several  solicitors  to  possess  a 
similar  power,  for  it  is  no  part  of  the  ordinary  business  of  a  solicitor 
to  draw,  accept,  or  indorse  bills  of  exchange.  The  question,  there- 
fore, can  one  partner  bind  the  firm  by  accepting  bills  in  its  name, 
admits  of  no  general  answer.  The  nature  of  the  business  and  the 
practice  of  those  who  carry  it  on  (usage  or  custom  of  the  trade)  must 
be  known  before  any  answer  can  be  given.  Lindley  on  Partnership, 
198-9-10.  It  is  further  said  by  the  same  author:  "It  is  clearly 
settled  that  any  member  of  an  ordinary  trading  partnership,  can 
bind  the  firm  by  drawing,  accepting  or  indorsing  bills  of  exchange 
or  by  making  and  indorsing  promissory  notes  in  its  name.  But  with 
respect  to  partnerships  which  are  not  trading  partnerships,  the  ques- 
tion, whether  one  partner  has  any  implied  authority  to  bind  his 
copartners  by  putting  the  name  of  the  firm  to  a  negotiable  instrument, 
depends  upon  whether  the  business  of  the  partnership  is  such  that 
dealings  in  negotiable  instruments  are  necessary  for  its  transaction } 
or  are  usual  in  partnerships  of  the  same  description.  In  the  absence 
of  evidence  showing  necessity  or  usage,  the  power  has  been  denied 
to  one  of  several  mining  adventures,  quarry  workers,  farmers  and 
solicitors."  Ibid.,  213-14. 

The  foregoing  principles,  as  we  think,  have  been  fully  recognized 
by  this  court  in  Crosthwaite  v.  Ross,  i  Hump.,  23,  where  the  distinction 
between  partners  in  trade  and  partners  in  occupation  or  employment 
is  taken,  and  the  power  of  the  former  class  to  bind  the  firm  by  draw- 
ing or  indorsing  notes  and  bills,  is  sustained,  while  it  is  denied  to  the 


MANAGEMENT  OF  THE  BUSINESS  UNIT  527 

latter  class.  It  is  there  held  that  one  partner  in  the  practice  of  physic 
could  not  bind  the  firm  by  drawing  a  bill  or  making  a  note  on  which 
to  raise  money,  because  it  was  not  within  the  scope  of  their  partner- 
ship, and  it  was  distinctly  held  that  the  power  to  raise  money  was  not 
one  of  the  implied  powers  resulting  from  such  an  association.  By 
recurring  to  the  instructions  given  by  the  court  below  in  this  case, 
it  will  be  seen  that  this  important  distinction  between  strictly  com- 
mercial or  trading  partnerships,  and  partnerships  in  occupation,  is 
entirely  ignored,  and  we  think  it  was  the  duty  of  the  court  to  point 
out  the  distinction,  for  prima  facie  it  cannot  be  said  that  one  partner 
in  a  printing  office  would  have  the  implied  power  to  bind  the  firm, 
by  drawing  or  indorsing  a  note.  In  this  case,  to  be  sure,  there  was 
some  evidence  of  the  usage  of  this  firm  to  deal  in  commercial  paper, 
but  there  was  also  evidence  tending  to  the  contrary  conclusion.  The 
consequence  of  this  distinction  between  trading  and  non-trading 
partnerships  is  very  important  in  reference  to  the  main  defense  to 
be  relied  upon  in  this  case.  If  a  partner  in  a  banking  firm,  for 
instance,  should  indorse  a  bill  or  note  for  his  private  debt,  and  it 
should  get  into  the  hands  of  a  bona  fide  holder  without  notice,  this 
firm  would  be  bound  by  it.  The  indorsing  or  making  such  paper, 
being  the  usual  mode  of  conducting  that  business,  the  public  have  a 
right  to  suppose  that  each  partner  is  empowered  to  accept  or  indorse 
for  the  firm,  and  are  not  bound  to  inquire  whether  in  a  given  instance 
the  act  was  done  with  the  assent  of  his  copartners.  But  not  so  with 
a  partnership  in  occupation  merely,  whose  business  does  not  ordinarily 
require  dealing  in  commercial  paper.  One  who  becomes  a  member  of 
such  a  firm  does  not  confer  implied  power  on  his  copartners  to  bind 
him  by  dealing  in  bills  or  notes.  He  is  not  clothed  with  apparent 
power  so  to  bind  his  firm,  and  no  person  dealing  with  the  firm  has  the 
right  to  suppose  that  the  powers  of  one  member  are  more  extensive 
than  is  implied  by  the  ordinary  mode  of  conducting  such  business. 
If  two  persons  are  associated  in  the  practice  of  law,  and  one  of  them, 
without  or  against  the  consent  of  the  other  should  indorse  a  note  or 
bill  for  his  private  purpose,  no  one  buying  such  bill  could  succeed  on 
the  plea  that  he  was  a  bona  fide  holder  without  notice.  For  the  reason 
that  by  forming  such  an  association  the  several  partners  do  not  hold 
each  other  out  to  the  world  as  empowered  to  use  their  names  as 
makers  or  indorsers  of  negotiable  paper. 

The  rules,  in  regard  to  notice  to  a  purchaser,  are  very  accurately 
laid  down  in  our  own  cases,  digested  in  Heiskell,  and  contain  a  much 


528  LAW  AND  BUSINESS 

more  accurate  statement  of  the  law  upon  the  subject  than  is  contained 
in  this  charge,  and  one  much  more  applicable  to  the  facts  of  the  case. 

Our  conclusion  is,  that  the  charge  of  the  court  in  reference  to  the 
facts  of  this  case,  if  it  does  not  amount  to  a  positive  misstatement 
of  the  law,  was  calculated  to  mislead  the  jury,  and  that  the  appellant 
is  entitled  to  a  new  trial,  although  he  failed  to  ask  further  instructions 
to  the  jury. 

On  hearing  this  cause  at  a  former  term,  the  court  decided  to  grant 
a  new  trial  and  it  is  now  before  us  on  application,  to  reconsider  the 
conclusion  at  which  the  court  then  arrived. 

On  a  reconsideration  of  the  case,  we  adhere  to  our  former  opinion, 
and  reverse  the  judgment  of  the  municipal  court,  and  remand  the 
cause  for  a  new  trial  in  accordance  with  the  principles  herein 
announced. 

QUESTIONS 

1.  "One  partner  can  bind  his  copartners  by  the  exercise  of  implied  powers 
as  well  as  by  express  powers."     What  is  the  difference  between  express 
and  implied  powers  ?     What  powers  will  in  general  be  implied  ?     Why 
do  partners  leave  any  of  their  powers  to  implication  ? 

2.  Suppose  that  a  partner  without  express  or  implied  authority  purports 
to  make  a  contract  for  the  firm,  what  is  the  effect  of  the  contract? 
Is  there  any  way  in  which  the  firm  can  take  advantage  of  the  unauthor- 
ized agreement  ? 

3.  What  error  did  the  trial  court  in  the  principal  case  commit  in  giving 
instructions   to   the  jury?      How   should    the   court   have   instructed 
the  jury  ? 

4.  A  and  B  are  partners,  engaged  in  the  practice  of  medicine.     A  signs 
a  note  in  the  firm  name  and  delivers  it  to  P  in  payment  of  his  own  debt. 
H,  a  holder  in  due  course,  sues  on  the  note.    What  decision  ? 

5.  A  and  B  are  partners  engaged  in  a  retail  clothing  business.     A  executes 
.   a  firm  note  and  delivers  it  to  P  in  payment  of  a  gambling  debt.    What 

are  the  rights  of  H  against  the  firm  on  the  note  ? 

6.  A  and  B  are  engaged  as  partners  in  a  banking  business.     H  is  holder  in 
due  course  of  a  firm  note  executed  by  B  in  payment  of  his  own  debt. 
What  are  H's  rights  on  the  note  ? 

7.  A  and  B  operate  a  farm.     A  borrows  money  from  P  on  the  credit  of  the 
firm  for  his  own  use.     P  sues  the  firm  for  money  so  advanced.     What 
decision  ? 


MANAGEMENT  OF  THE  BUSINESS  UNIT  529 

LEFFLER  v.  RICE 
44  Indiana  Reports  103  (1873) 

DOWNEY,  C.  J.  The  appellee  sued  the  appellants  for  work  and 
labor,  for  money  loaned,  money  had  and  received,  for  board  and 
lodging,  and  for  wood,  provisions,  and  merchandise,  a  bill  of  par- 
ticulars of  which  was  filed  with  the  complaint.  The  defendants 
answered  in  three  paragraphs:  (i)  A  general  denial;  (2)  payment; 
(3)  set-off.  Reply  in  denial  of  the  second  and  third  paragraphs  of  the 
answer.  Trial  by  the  court,  finding  for  the  plaintiff,  motion  for  a  new 
trial  overruled,  and  final  judgment  for  the  plaintiff. 

The  only  errors  properly  assigned  are  the  overruling  of  the  motion 
for  a  new  trial,  and  the  taxing  of  a  reporter's  fee  for  taking  down  the 
evidence  in  the  case  against  the  defendants,  as  part  of  the  costs  of  the 
case. 

The  grounds  for  a  new  trial  are  the  following:  (i)  Because  the 
finding  and  judgment  thereon  are  contrary  to  the  evidence;  (2) 
because  of  errors  of  law  occurring  during  the  trial  of  said  cause,  in  the 
ruling  of  the  court  as  to  the  admissibility  of  evidence  excepted  to  at 
the  time;  (3)  because  of  errors  of  law  in  the  ruling  of  the  court  arising 
on  the  pleadings  in  said  cause,  and  excepted  to  at  the  time. 

The  principal  question  made  with  reference  to  the  evidence  is, 
that  it  fails  to  show  that  the  indebtedness  for  which  the  judgment  was 
rendered  was  an  indebtedness  of  both  of  the  defendants.  They  are 
charged  as  partners,  and  it  is  insisted  that,  although  the  evidence 
may  show  a  liability  on  the  part  of  Rice,  one  of  the  defendants,  it 
fails  to  show  that  Leffler,  the  other  defendant,  was  liable  with  him  as 
a  partner.  In  other  words,  it  is  claimed  that  the  indebtedness  was 
the  indebtedness  of  Rice  alone,  and  not  of  the  firm.  It  is  also  insisted 
that,  assuming  that  the  indebtedness  was  that  of  the  firm,  the  same 
had  been  paid  before  the  action  was  brought. 

During  the  progress  of  the  trial,  the  plaintiff  admitted  the  account 
of  the  defendant  filed  with  his  answer  of  set-off,  and  it  was  mutually 
agreed  that  the  only  matters  then  in  issue  were  a  certain  sum  of  two 
hundred  dollars,  called  the  Eller  money,  three  hundred  and  fifty 
dollars  of  Allen  money,  the  money  taken  to  pay  for  middlings,  and 
the  pay  which  the  plaintiff  might  be  entitled  to  for  such  purchases  as 
he  had  made  for  the  mill  of  the  defendants. 

After  a  careful  reading  and  analysis  of  the  evidence,  we  have  come 
to  the  conclusion  that  we  cannot  disturb  the  judgment  below  on  the 


530  LAW  AND  BUSINESS 

evidence.  It  is  true  that  Leffler,  one  of  the  defendants,  testifies 
pretty  strongly  against  his  liability  as  a  member  of  the  firm;  but  it 
appears  that  he  was  much  of  the  time  absent  from  the  place  of  business, 
and  that  Rice,  his  partner,  at  those  times,  transacted  the  business 
exclusively,  and  that  he  always  kept  the  books  of  the  concern.  It 
also  appears  that  Leffler  knew  so  little  about  the  affairs  of  the  concern, 
that  it  was  not  until  he  got  an  account  taken  by  an  accountant,  that 
he  was  aware  of  the  fact  that  his  partner,  Rice,  had  overdrawn  to  an 
amount  exceeding  a  thousand  dollars.  Little  weight  can,  therefore, 
be  given  to  his  statements  to  the  effect  that  he  did  not  know  that  the 
firm  owed  the  amounts  in  question. 

Rice,  the  appellant,  is  a  son  of  the  appellee.  There  seems  to 
have  been  a  sharp  contention  between  them  concerning  the  dis- 
puted accounts  amounting  even  to  violence  on  one  occasion.  Their 
testimony  is  quite  conflicting  on  the  material  points  of  the  case. 

It  is  urged  as  a  question  of  law  that  Rice,  one  of  the  defendants, 
could  not  bind  Leffler,  his  partner,  for  the  items  in  question,  for  the 
reason  that  they  were  foreign  to  the  business  of  the  firm.  Two  of  the 
items  claimed  by  the  appellee  were  for  money  loaned,  one  was  for 
money  paid  for  middlings,  and  one  was  for  services  in  the  purchase  of 
grain,  etc.  The  business  of  the  defendants  was  that  of  milling.  We 
do  not  see  that  the  items  of  indebtedness  are  such  as  might  not 
properly  and  reasonably  have  accrued  in  connection  with  the  business. 
We  are  aware  of  the  rule  of  law  stated  by  counsel  for  appellants,  that 
where  a  person  takes  a  security  from  one  partner  in  the  name  of  the 
partnership,  in  a  transaction  not  in  the  usual  course  of  dealing,  he 
takes  the  security  at  his  peril.  Money  may  properly  be  borrowed  by 
a  partner  to  be  used  in  the  business  of  milling  by  the  firm.  The 
evidence  of  the  plaintiff  tends  to  show  that  the  middlings  in  question 
were  purchased  to  be  ground  over  at  the  mill  of  the  defendants, 
which  would  seem  to  be  properly  connected  with  the  business  of 
milling;  and  as  to  the  compensation  for  purchasing  grain  for  the  mill, 
there  cannot  well  be  any  question.  The  items  of  these  classes,  which 
the  evidence  of  the  plaintiff  tended  to  establish,  amount  to  more 
than  the  sum  of  the  judgment. 

The  judgment  is  affirmed,  with  costs. 

QUESTIONS 

i.  What  were  the  claims  against  the  firm  for  which  this  action  was  brought  ? 
Did  Rice  have  express  authority  to  bind  the  firm  for  these  things? 
If  not,  why  was  the  firm  held  liable  for  them  ? 


MANAGEMENT  OF  THE  BUSINESS  UNIT  531 

2.  A  and  B  are  partners  in  the  retail  grocery  business.     A,  without  express 
authority,  buys  fifty  hams  from  P  for  the  business.     P  brings  an  action 
against  the  firm  for  the  price  of  the  hams.     What  decision  ? 

3.  In  the  foregoing  case,  A  borrows  five  hundred  dollars  from  P  with 
which  to  pay  for  sugar  for  the  firm.     P  sues  the  firm  for  the  amount  so 
advanced.     B  contends  that  the  firm  is  not  liable  because  A  had  no 
authority  to  borrow  the  money.     What  decision  ? 

4.  C  and  D  are  engaged  in  the  jewelry  business  as  partners.     C  without 
the  knowledge  or  consent  of  D  bought  ten  diamond  rings  from  P  on  the 
firm  credit,  immediately  sold  the  rings  and  absconded  with  the  money. 
P  sues  the  firm  for  the  price  of  the  rings.     What  decision  ? 

5.  M  and  N  are  partners  in  the  retail  hardware  business.     M  buys  a  heater 
from  P,  telling  P  that  it  is  for  his  own  home.     P  brings  an  action  against 
the  firm  for  the  price  of  the  heater.     What  decision  ? 

6.  Would  your  answer  be  the  same  in  the  foregoing  case  if  A  had  decided 
not  to  use  the  heater  in  his  home  and  had  turned  it  over  to  the  firm 
business  ? 

TAPLEY  v  BUTTERFIELD 
i  Metcalf's  Massachusetts  Reports  515  (1840) 

Trespass  de  bonis  asportatis.  The  plaintiff  claimed  title  to  the 
goods  under  a  mortgage  made  to  him  as  hereinafter  stated.  The 
defendant  admitted  the  taking  of  the  goods,  and  justified  under  a 
writ  by  virtue  of  which  he,  as  deputy  sheriff,  attached  the  same  in 
suit  by  P.  and  B.  S.  Hale  against  the  firm  of  A.  and  W.  A.  Blaisdell. 

At  the  trial  before  PUTNAM,  J.,  it  was  proved,  that  said  firm  was 
indebted  to  the  plaintiff  in  the  sum  of  $650,  and  that  A.  Blaisdell, 
one  of  the  partners,  in  the  absence  of  the  other  partner,  and  without 
his  knowledge,  executed  to  the  plaintiff  a  mortgage  of  the  goods  in 
question,  being  the  whole  stock  in  trade  of  the  firm.  The  separate 
names  of  each  partner  were  several  times  recited  in  the  mortgage,  as 
conveying  the  goods  to  the  plaintiff,  and  the  instrument  concluded 
with  these  words:  "  In  witness  whereof,  I,  the  said  Alvah  &  William  A. 
Blaisdell,  have  hereunto  set  our  hands  and  seals  this  24th  day  of  May, 
1839."  One  "seal  only  was  affixed. 

W.  A.  Blaisdell  testified  that  if  he  had  been  present  when  the 
mortgage  wa,s  given,  he  should  not  have  executed  it. 

The  goods  were  sold  by  the  defendant,  on  the  writ,  by  consent  of 
parties,  on  the  next  day  after  they  were  attached.  But  the  plaintiff 
did  not  demand  payment  of  the  money  due  to  him,  and  state  in  writing 
an  account  of  the  debt  for  which  said  goods  were  liable  to  him,  until 
thirteen  days  after^the_sale. 


532  LAW  AND  BUSINESS 

The  defendant's  counsel  objected  to  the  plaintiff's  right  to  recover, 
on  the  ground  that  said  mortgage  was  not  valid.  The  judge  over- 
ruled the  objection,  and  a  verdict  was  returned  for  the  plaintiff,  subject 
to  the  opinion  of  the  full  court. 

SHAW,  C.  J.  If  it  were  necessary,  in  order  to  maintain  the 
validity  of  the  mortgage  under  which  the  plaintiff  claims,  to  hold  that 
one  partner  has  a  general  power  to  bind  his  copartner  by  deed,  it 
would  certainly  be  difficult  to  maintain  that  proposition.  The 
general  rule  is,  that  he  cannot.  Cody  v.  Shepard,  n  Pick.  400.  And 
in  a  case  where  the  question  is,  whether  one  partner  can  by  his  general 
authority,  growing  out  of  the  relation  of  partners,  execute  a  deed  in 
the  name  of  both,  in  such  form  as  to  pass  real  estate  belonging  to 
them  as  partners,  or  to  render  them  liable  to  an  action  of  covenant, 
I  should  be  strongly  inclined,  upon  the  authorities,  to  think  that  he 
could  not.  But  that  rule  does  not  decide  the  present  case. 

We  are  not  aware  that  a  mortgage  of  personal  property  requires  a 
deed.  If  an  act  be  done,  which  one  partner  may  do  without  deed, 
it  is  not  the  less  effectual,  that  it  is  done  by  deed.  It  is  clearly 
within  the  scope  of  partnership  authority  (I  speak  of  a  partnership 
between  merchants,  the  object  of  which  is  the  buying  and  selling  of 
goods)  for  one  partner  to  sell  such  goods  as  have  been  purchased 
for  sale.  Supposing  then  a  customer,  purchasing  for  some  special 
purpose  of  his  own,  should,  instead  of  a  sale  by  parol,  or  a  common 
bill  of  parcels,  or  a  bought  and  sold  note,  choose  to  have  a  formal 
bill  of  sale  under  seal,  in  the  name  of  the  firm,  and  such  bill  should  be 
executed  by  one  of  the  partners;  though  the  firm  might  not  be  liable 
to  an  action  on  the  special  covenants,  yet  the  property  would  pass. 
And  although  the  bill  of  sale  should  purport  to  be  the  act  of  both, 
it  would  not  be  the  less  the  act  of  him  who  made  it;  and  as  his  act 
would  be  sufficient  to  pass  the  property,  it  would  not  be  less  available 
because  the  name  of  his  partner  was  added  in  such  a  form  as  to  be 
inoperative. 

Then  treating  this  as  the  efficient  act  of  one  partner,  in  giving  a 
mortgage  upon  the  partnership  property  for  the  security  of  a  partner- 
ship debt,  is  it  sufficient  to  bind  the  property  ? 

It  is  within  the  general  scope  of  partnership  authority  for  one 
partner  to  sell  and  dispose  of  all  the  partnership  goods,  in  the  orderly 
and  regular  course  of  business.  It  is  also  within  the  scope  of  partner- 
ship authority  to  pay  the  debts  of  the  firm,  and  to  apply  the  assets  of 
the  firm  for  that  purpose.  He  being  authorized  to  sell  the  goods  to 


MANAGEMENT  OF  THE  BUSINESS  UNIT  533 

raise  money  to  pay  their  debts;  he  may  apply  the  goods  directly  to 
the  payment  of  the  debts;  and,  according  to  the  exigencies  of  the 
occasion,  he  may  pledge  the  partnership  goods  to  raise  money  to  pay 
the  debts  of  the  firm.  To  this  extent  we  think  each  partner  has  a 
disposing  power  over  the  partnership  stock,  arising  necessarily  from 
the  nature  of  that  relation.  If  it  were  in  the  form  of  a  consignment 
to  a  commission  merchant  or  an  auctioneer,  and  an  advance  of 
money  obtained  for  the  use  of  the  firm,  we  think  there  could  be  no 
question  but  that  it  would  be  within  the  scope  of  partnership  author- 
ity. And  now  that  the  law  has  given  encouragement  to  mortgages 
of  personal  property — which  is  only  another  mode  of  pledging  goods — 
and  has  substituted  an  instrument  in  writing  capable  of  being  recorded 
in  the  town  clerk's  book,  and  has  given  to  such  record  an  effect 
equivalent  to  the  actual  delivery  of  the  goods  (Bullock  v.  Williams, 
1 6  Pick.  33),  we  cannot  perceive  why  it  may  not  be  resorted  to  by 
partners,  as  well  as  individual  persons.  To  what  extent  one  partner 
can  bind  another,  in  the  disposition  of  the  entire  property  of  the 
concern,  is  a  question  of  power,  arising  out  of  the  relation  of  partner- 
ship, and  does  not,  we  think,  depend  upon  the  form  or  manner  in 
which  it  is  exercised.  Lands  held  by  partners  are  considered  as 
lands  held  by  tenants  in  common;  and  as  one  tenant  in  common 
cannot  pass  any  estate  of  his  covenant,  and  as  land  cannot  pass  with- 
out deed,  it  follows  that  one  partner  cannot  convey  away  the  real 
estate  of  the  firm,  without  special  authority. 

But  considering  that  the  authority  of  selling  and  pledging  the 
personal  property  is  within  the  scope  of  partnership  power,  and  may 
be  done  by  either  partner;  and  considering,  that  it  may  be  done  with- 
out deed;  the  court  is  of  opinion  that  such  a  mortgage,  made  by 
one  partner  in  the  absence  of  the  other,  although  unnecessarily  made 
by  deed,  was  binding  upon  the  property,  and  constituted  a  valid 
lien  upon  the  property,  of  which  the  plaintiff  may  avail  himself. 
Anderson  v.  Tompkins,  i  Brock.  456;  Deckard  v.  Case,  5  Watts,  22. 

Judgment  on  the  verdict. 

QUESTIONS 

1 .  What  is  the  extent  of  the  authority  of  a  partner  to  dispose  of  the  stock 
in  trade  of  his  firm  ? 

2.  A  and  B  are  engaged  in  the  grocery  business  as  partners.     A,  without 
express  authority,  sells  the  cash  register  of  the  firm  to  P.     The  firm 
brings  an  action  to  recover  possession  of  the  property.    What  decision  ? 


534  LAW  AND  BUSINESS 

3.  A  pledges  the  cash  register  with  C  to  secure  a  debt  which  the  firm  owes 
to  C.     The  firm  sues  to  recover  possession  of  the  property.     What 
decision  ? 

4.  W,  without  the  knowledge  or  consent  of  B,  placed  a  chattel  mortgage 
on  the  stock  in  trade  of  the  firm  to  secure  the  debt  of  C.     Discuss  the 
validity  of  the  mortgage. 

5.  A  without  B's  consent  executes  and  delivers  a  deed  to  P  purporting  to 
convey  the  land  and  building  belonging  to  the  firm.     P  brings  an  action 
against  the  firm  for  possession  of  the  property.     What  decision  ? 

6.  C  and  D  are  partners  engaged  in  the  business  of  buying  and  selling 
realty.     They  acquire  joint  title  to  a  tract  of  land  which  they  intend  to 
resell  later  on.     C  without  D's  consent  purports  to  convey  the  land  to  P. 
Discuss  the  validity  of  the  conveyance. 

7.  In  the  foregoing  case,  C  enters  into  a  contract  to  sell  the  land  to  P. 
P  brings  an  action  against  the  firm  for  its  refusal  to  sell  the  land.     What 
decision  ? 

8.  C  holds  title  to  a  piece  of  firm  realty.    Without  B's  consent  he  makes 
and  delivers  a  deed  to  P  purporting  to  convey  the  land  in  question. 
What  is  the  effect  of  the  conveyance  ? 


MAJOR  v.  HAWKES 
12  Illinois  Reports  298  (1850) 

The  defendants  in  error  sued  Major,  in  the  McLean  Circuit 
Court,  to  recover  an  indebtedness  due  to  them  as  copartners.  Major 
proved  the  payment  of  his  indebtedness  to  Hawkes,  one  of  the  co- 
partners, after  the  publication  of  a  notice  of  dissolution,  by  mutual 
consent.  A  verdict  was  found  on  the  circuit,  against  Major,  and 
he  brings  the  cause  to  this  court  by  writ  of  error.  The  cause  was 
heard  before  DAVIS,  J. 

TRUMBULL,  J.  Upon  the  voluntary  dissolution  of  a  partnership, 
each  of  the  partners,  in  the  absence  of  any  agreement  to  the  contrary, 
retains  the  right  to  collect  debts  due  the  firm,  and  give  discharges 
therefor.  Story  on  Partnership,  section  328. 

Hawkes  had,  therefore,  just  as  much  right  to  receive  the  money 
from  Major,  and  give  the  receipt  of  the  firm,  as  either  of  the  other 
partners  and  the  receipt,  if  honestly  obtained,  was  a  defense  to  the 
further  prosecution  of  the  action.  The  fact,  that  Major  first  made 
an  attempt  to  settle  the  account  by  giving  Hawkes  credit  upon  a 
claim  which  he  had  against  him  individually,  did  not  prevent  him 
from  afterward  paying  the  money  to  Hawkes,  when  he  ascertained 


MANAGEMENT  OF  THE  BUSINESS  UNIT  535 

that  the  other  partners  would  not  assent  to  the  first  arrangement. 
Major  was  not  responsible  for  the  application  which  Hawkes  made 
of  the  money,  so  that  he  paid  it  in  good  faith,  nor  does  the  insolvency 
of  Hawkes,  at  the  time,  alter  the  case.  The  record  shows,  thaFhe~ 
was  known  by  the  other  partners  to  have  been  insolvent  when  the 
partnership  was  formed.  They  were  willing  to  trust  him,  notwith- 
standing, and  by  becoming  his  partners,  gave  to  him  the  same  right 
to  receive  the  debts,  that  should  become  due  the  firm  which  either  of 
them  should  possess.  It  is  true,  that  without  the  assent  of  his 
copartners,  he  had  no  right  to  apply  partnership  effects  in  discharge  of 
his  individual  indebtedness,  and  a  creditor  of  his,  knowingly  receiving 
such  effects  in  discharge,  would  be  responsible  for  the  same  to  the 
firm. 

To  deprive  Major  of  the  benefit  of  the  payment  made  to  Hawkes, 
it  was  incumbent  upon  the  plaintiffs  below,  to  show  that  it  was  made 
in  good  faith.  It  has  been  suggested  by  counsel,  that  the  money 
was  returned  to  Major,  after  being  paid  over,  but  there  is  no  evidence 
in  the  case  to  justify  such  a  presumption.  The  witness  to  the  receipt 
testifies  that  the  money  was  paid  over  to  Hawkes  in  his  presence,  and 
this  is  all  the  evidence  in  the  record  about  the  money.  For  aught 
that  appears,  Hawkes  may  have  accounted  with  his  copartners  for 
the  money  received  from  Major,  but  whether  he  has  or  not,  is  quite 
immaterial  to  Major,  provided  he  honestly  paid  the  money,  and  has 
in  no  way  aided  or  abetted  in  the  misapplication  of  it.  There  would 
be  no  safety  in  paying  a  partnership  debt  to  a  single  member  of  a 
firm,  if  the  debtor  was  bound  to  see  that  the  money  was  properly 
applied  by  the  partner  receiving  it. 

The  judgment  of  the  circuit  court  is  reversed  and  the  cause 
remanded. 

Judgment  reversed. 

QUESTIONS 

1 .  When  a  firm  for  any  reason  is  dissolved,  who  has  the  power  to  settle  the 
partnership  affairs  ? 

2.  A,  B,  and  C  mutually  agree  to  dissolve  the  firm  theretofore  existing 
between  them.     A,  after  dissolution,  (a)  pays  a  firm  debt  to  X,  (b) 
receives  from  Y  a  debt  which  Y  owes  to  the  firm,  and  (c)  sells  the  remain- 
ing stock  in  trade  to  Z.     Discuss  the  validity  of  each  transaction. 

3.  After  dissolution  B  executes  a  promissory  note  in  the  firm  name  and 
delivers  it  to  E  in  payment  of  a  firm  obligation.     E  sues  A,.  B,  and  C 
on  the  note.     What  decision  ? 


536  LAW  AND  BUSINESS 

4.  At  dissolution  the  firm  holds  two  unmatured  promissory  notes.     C 
transfers  one  of  the  notes  by  a  general  indorsement  to  P  and  the  other 
by  a  qualified  indorsement  to  Q.     Discuss  the  validity  of  each  transac- 
tion. 

5.  M,  N,  and  O  are  members  of  a  partnership  engaged  in  the  grocery 
business.     O  dies.     What  are  the  powers  of  M  and  N  in  closing  up  the 
partnership  affairs  ? 

c)     Powers  of  Representatives 

HUTCHINSON  v.  GREEN 

91  Missouri  Reports  367  (1886) 

BLACK,  J.  This  case  is  an  outgrowth  of  Ward  v.  Davidson, 
89  Mo.  445.  By  the  decree  rendered  in  that  case  certain  directors  of 
the  Keokuk  Northern  Line  Packers  Co.  were  removed  from  office. 
Thereafter,  and  at  a  special  election  held  on  the  seventeenth  of 
November,  1880,  pursuant  to  the  order  of  the  circuit  court,  four 
directors  were  elected  to  fill  the  unexpired  term  of  the  removed 
directors.  There  had  been  a  disagreement  of  long  standing  between 
the  officers  and  stockholders  as  to  the  management  of  the  affairs  of 
the  company,  which  resulted  in  two  parties,  one  known  as  the  David- 
son, or  majority  party,  and  the  other  as  the  Gray,  or  minority  party; 
the  removed  directors  were  of  the  former.  By  cumulative  voting 
at  the  special  election  the  minority  party  elected  a  sufficient  number 
of  directors  to  give  them  a  majority  in  the  board  for  the  time  being. 
On  the  fifteenth  of  January,  1881,  and  four  days  before  the  annual 
election  of  directors,  notice  of  which  had  been  given,  the  board 
resolved  to,  and  did,  make  a  voluntary  assignment  of  all  of  the  property 
of  the  company  for  the  benefit  of  all  of  the  creditors.  At  the  annual 
election  the  majority  party  again  acquired  the  ascendency  in  the 
board,  and  the  plaintiffs  then,  for  themselves,  and  other  stockholders 
brought  this  suit  against  the  directors  who  voted  for  the  assignment. 
They  allege  that  the  defendants  combined  to  destroy  the  property 
and  business  of  the  corporation,  and  in  furtherance  thereof  made  the 
assignment,  and  pray  that  the  deed  of  assignment  be  set  aside  for 
the  alleged  fraud,  for  other  equitable  relief,  and  for  damages. 

The  defendants,  in  making  the  assignment,  acted  in  part,  at 
least,  upon  a  report  made  by  a  committee  appointed  to  examine  into 
the  affairs  of  the  company.  That  report  clearly  enough  shows  that 
the  company  was  unable  to  pay  its  debts  in  the  usual  course  of 
business.  But  the  correctness  of  that  report  was  then,  and  is  now, 


MANAGEMENT  OF  THE  BUSINESS  UNIT  537 

denied.  The  new  board  caused  another  report  to  be  made,  by  a  new 
committee,  in  which  the  debts  are  placed  at  $161,944.07,  and  in  this 
respect  the  two  reports  are  not  materially  different.  In  the  last, 
the  effects  are  valued  at  $234,229.35;  thus  leaving  a  surplus  over 
liabilities  of  $72,285.62.  No  account  is  taken  of  capital  stock, 
amounting  to  $751,000,  paid  in  full.  The  evidence  as  to  the  value 
of  the  assets  is  conflicting  and  unsatisfactory;  many  of  the  witnesses 
having  but  little  knowledge  of  the  property  about  which  they  testi- 
fied. In  the  last  report  warehouses  are  placed  at  $47,197.87,  and 
cash  and  bills  receivable  appear  to  be  estimated  at  $9,000  or  $10,000. 
The  evidence  shows  that  the  warehouses  were  poor  affairs,  scattered 
along  the  river  from  St.  Louis  to  St.  Paul,  on  property  not  owned  by 
the  company,  and  were  of  no  greater  value  than  $18,000.  The  bills 
receivable  were  of  little  value,  and  the  company  had  no  money  on 
hand  worthy  of  mention.  The  best  steamboats,  barges,  and  wharf- 
boats  were  mortgaged  to  at  least  $47,000.  Some  of  the  boats  and 
barges  were  wrecks,  all  were  out  of  repair,  and  to  put  them  in  repair 
would  require  an  outlay  of  $40,000.  New  boats  and  barges  were 
required  to  carry  on  the.  former  business  of  the  company.  The  loss  in 
business  for  1880  had  been  $60,000.  Suits  were  pending  against  the 
company  for  large  amounts.  These  plaintiffs  and  those  acting  in  concert 
with  them  had,  at  the  date  of  the  assignment,  begun  suits  against  the 
company  amounting  to  $90,000,  some  commenced  in  foreign  jurisdic- 
tions by  attachment.  From  the  evidence,  as  a  whole,  we  conclude 
the  entire  property  of  the  company  was  not  worth  more  than  $190,000 
under  the  most  favorable  circumstances,  and  as  a  means  of  raising 
ready  money,  it  was  not  equal  to  the  debts.  In  short,  it  is  clear  the 
corporation  was  insolvent,  and  wholly  unprepared  to  enter  the  spring 
trade. 

On  the  other  hand,  the  defendants,  as  directors,  voted  for  and 
caused  the  assignment  to  be  made  in  opposition  to  the  known  and 
expressed  will  of  a  majority  of  the  stockholders.  They  knew  their 
power  to  control  the  affairs  of  the  corporation  must  cease  at  the 
coming  election,  only  four  days  distant.  They  also  agreed  among 
themselves  to  make  the  assignment  before  presenting  the  matter 
openly  at  a  meeting  of  the  directors,  and  then  they  had  a  deed  previ- 
ously prepared,  with  a  notary  public  at  hand  to  take  the  acknowledg- 
ment as  soon  as  the  resolution  should  be  passed.  Any  inferences  of 
fraud  which  might  be  drawn  from  these  circumstances  if  they  stood 
alone  is  overcome  by  the  other  facts  in  the  case;  for  the  defendants 


538  LAW  AND  BUSINESS 

knew  that  the  affairs  of  the  corporation  were  growing  from  bad  to 
worse.  They  saw  the  efforts  of  the  plaintiffs,  and  those  acting  with 
them,  to  appropriate  the  property  of  the  company  to  the  payment 
of  their  debts,  in  disregard  of  the  other  creditors.  Enough  has  been 
said  to  show  that  the  Packet  Co.  was  in  no  condition  to  prosecute 
its  business — was  insolvent.  Under  these  circumstances,  the  direc- 
tors, having  a  due  regard  for  the  creditors  in  general,  could  not  do 
otherwise  than  make  an  assignment.  The  alleged  fraud,  we  conclude, 
is  not  proved,  but  clearly  disproved. 

It  is  further  insisted  that  the  board  of  directors  had  no  power  to 
make  the  assignment  without  the  consent  of  the  stockholders.  A 
corporation  may,  like  an  individual,  make  an  assignment  under  the 
statute  of  this  state  relating  to  voluntary  assignments.  Shockley  v. 
Fisher,  75  Mo.  498.  By  whom,  then,  is  the  power  to  be  exercised  ? 
By  the  directors,  the  stockholders,  or  by  both  ?  Where  the  powers  of 
a  corporation  are  vested  in  a  board  of  directors,  they  may,  unless 
restricted,  do  whatever  the  corporation  might.  Field  on  Corporations, 
sections  146  and  152.  Now,  while,  by  express  statute,  a  vote  of  the 
stockholders  of  these  corporations  is  essential  to  enable  them  to 
increase  or  diminish  the  stock,  to  change  the  business,  to  issue  pre- 
ferred stock,  and  to  convert  bonds  into  stocks,  still,  in  general, 
article  8,  of  chapter  21,  Revised  Statutes,  contemplates  that  the 
business  will  be  conducted  by  a  board  of  directors.  Section  930, 
among  other  things,  provides  that  "the  property  or  business  of  the 
corporation  shall  be  conducted  and  managed  by  directors."  Certain 
it  is  there  is  nothing  in  the  statute  under  which  the  corporation  was 
created,  and  by  which  it  is  governed,  or  in  its  articles  of  association, 
or  by-laws,  which  limits  or  restricts  the  powers  of  the  directors  in  the 
disposition  of  the  property.  The  corporation  then  has  the  power 
to  make  an  assignment,  and  that  power  being  vested  in  the  directors 
without  restriction,  it  must  follow  that  they,  and  they  alone,  are 
authorized  to  make  it.  It  is  the  duty  of  the  directors  to  care  for  the 
creditors,  and  when  the  corporation  becomes  crippled  and  unable 
to  meet  its  obligations  in  the  usual  course  of  business,  it  is  competent 
for  the  directors  to  make  an  assignment,  and  this  they  may  do  without 
the  consent  of  the  stockholders.  This  conclusion  has  the  support 
of  adjudications  of  this  and  other  courts.  Chew  v.  Ellingwood, 
86  Mo.  260;  Dana  v.  The  Bank  of  the  United  States,  5  W.  &  S.  (Pa.) 
223;  DeCamp  v.  Alward,  52  Ind.  473.  The  directors  may,  with 
propriety,  consult  with  the  stockholders,  but  under  the  circumstances 


MANAGEMENT  OF  THE  BUSINESS  UNIT  539 

just  stated  and  in  the  exercise  of  their  best  judgment,  they  may  make 
the  assignment  even  against  the  expressed  will  of  the  stockholders. 
Of  the  cases  relied  upon  by  the  appellants  that  of  Abbot  v.  American 
Hard  Rubber  Co.,  33  Barb.  580,  was  not  an  assignment  for  the  benefit 
of  creditors.  There  the  trustees  attempted,  through  the  form  of  a 
sale,  to  secure  to  themselves  the  property  of  the  corporation  at  the 
expense  of  the  other  stockholders.  The  sale  was  voidable,  as  to  the 
stockholders  not  consenting,  though  a  majority  agreed  to  the  trans- 
action. 

No  question  of  the  validity  of  a  voluntary  assignment  of  an 
insolvent  corporation,  made  for  the  benefit  of  the  creditors,  was 
involved  in  the  case.  The  same  may  be  said  of  Northern  Railroad  v. 
Concord  Railroad,  50  N.H.  175,  for  there  the  purpose  of  the  contract, 
brought  in  question,  was  to  transfer  the  management  of  the  affairs 
of  one  company  to  the  other  for  a  period  of  five  years.  The  assign- 
ment was  upheld  in  Eppright  v.  Nicker  son,  78  Mo.  482,  though  the 
stockholders  did  not  authorize  or  assent  to  it.  In  that  case  the 
assignment  was  not  assailed  by  any  stockholder,  and  the  court,  by 
way  of  concession,  made  some  remarks  which  seem  to  imply  that 
consent  on  the  part  of  the  stockholders  is  essential  to  give  validity 
to  an  assignment  as  against  them,  but  as  to  these  remarks,  enough 
was  said  in  Chew  v.  Ellingwood,  supra. 

The  judgment  of  this  case  is,  therefore,  affirmed. 

QUESTIONS 

1.  How  are  the  directors  of  a  corporation  elected  ?    How  many  are  elected  ? 
Must  a  director  be  a  stockholder  in  the  corporation?     Can  they  be 
removed  from  office  ?    If  so,  for  what  causes  and  how  are  they  remov- 
able?   Are  directors  of  a  corporation  entitled  to  compensation  for 
their  services  ? 

2.  In  general  what  powers  are  possessed  by  directors  in  the  management 
of  the  affairs  of  a  corporation?    What  are  the  sources  of  the  powers 
of  directors  ? 

3.  The  charter  of  the  D  Company  vests  the  management  of  the  corporation 
in  a  board  of  directors  to  be  elected  annually.    The  directors  without 
consulting  the  stockholders  take  the  following  actions:   (a)  they  borrow 
money  on  the  credit  of  the  corporation  with  which  to  extend  the  business; 
(6)  they  execute  a  mortgage  on  the  real  and  personal  property  to  secure 
a  debt  of  the  corporation;   (c)they  sell  a  part  of  the  corporate  property 
with  which  to  pay  a  corporate  debt.     Discuss  the  validity  of  each 
transaction. 


540  LAW  AND  BUSINESS 

4.  The  directors  take  the  following  actions  without  consulting  the  stock- 
holders:    (a)   they  accept   an  amendment   to    their    original    charter 
giving  the  corporation  new  powers;    (6)  they  increase  the  capital  stock, 
(c)  they  decrease  the  capital  stock ;   (d)  they  consolidate  the  corporation 
with  X  Company;   (e)  they  sell  all  the  property  of  the  corporation  with 
a  view  to  going  out  of  business.     Discuss  the  validity  of  each  trans- 
action. 

5.  What  rule  does  the  cause  of  Hunter  v.  Roberts,  supra,  page  422,  lay  down 
with  respect  to  the  power  of  the  directors  in  declaring  dividends  ? 

6.  What  rule  does  the  case  of  Morton  Gravel  Road  Co.  v.  Wysong,  supra, 
page  505,  announce  with  respect  to  the  power  of  directors  in  the  making 
of  by-laws  ? 

THE  FIRST  NATIONAL  BANK  OF  FORT  SCOTT  v.  DRAKE 

35  Kansas  Reports  564  (1886) 

JOHNSTON,  J.  This  case  can  be  easily  disposed  of.  The  only 
question  presented  arises  upon  the  refusal  of  the  court  to  enter  judg- 
ment in  favor  of  the  plaintiff  upon  the  findings  of  the  jury  for  the 
amount  of  money  taken  from  the  bank  by  the  defendant  as  interest 
on  demand  certificates  of  deposits  that  had  been  issued  to  himself 
while  he  was  serving  as  president  and  cashier  of  the  bank.  The 
defendant  admits  that  he  took  the  money  at  the  times  and  in  the 
amounts  charged  by  the  plaintiff,  and  the  jury  have  found  that  during 
all  the  time  the  defendant  was  acting  as  an  officer  of  the  bank,  there 
existed  a  rule  or  by-law  of  the  bank  which  prohibited  the  payment  of 
interest  on  demand  certificates  of  deposit,  and  that  at  no  time  while 
the  defendant  was  an  officer  of  the  bank  did  he  ever  inform  the  board 
of  directors  that  he  had  taken  interest  on  these  certificates;  and  it 
was  also  found  that  the  directors  did  not  at  any  meeting  of  the 
board  authorize  or  ratify  the  action  of  the  defendant  in  taking  interest. 
The  defendant  contended  and  contends  that  although  his  act  in 
taking  the  money  was  contrary  to  the  by-laws  of  the  bank,  yet  that 
there  had  been  a  ratification  of  the  unauthorized  act  by  the  board  of 
directors  which  is  binding  upon  the  bank.  After  stating  that  the 
directors  had  never  at  any  meeting  of  the  board  ratified  the  taking 
of  interest  by  the  defendant,  the  question  was  asked  the  jury:  "Did 
the  board  of  directors  at  any  time  ratify  the  taking  of  the  several 
amounts  of  interest?"  To  this  question  an  affirmative  answer  was 
given;  but  in  the  next  finding  the  jury  explained  particularly  how 
the  supposed  ratification  had  been  made,  finding  that  it  was  "by 


MANAGEMENT  OF  THE  BUSINESS  UNIT  541 

individual  consent  of  a  majority  of  the  board."  The  last  finding, 
stating  particularly  what  was  done,  controls  and  prevails  over  the 
former  one  stating  the  general  conclusion  that  there  had  been  a 
ratification.  These  findings  clearly  show  that  the  only  sanction 
which  the  unauthorized  acts  of  the  defendant  have  received  from  the 
plaintiff,  was  given  by  the  individual  members  of  the  board  acting 
singly  and  separately,  and  not  as  a  board.  Action  thus  taken  is  not 
binding  on  the  bank,  and  does  not  constitute  a  defense  to  the  plaintiff's 
claim.  The  statute  declaring  the  methods  in  which  the  bank  may 
exercise  corporate  power  provides  that  the  appointment  and  dismissal 
of  its  officers,  the  enactment  of  by-laws  regulating  the  manner  in 
which  its  officers  and  agents  shall  conduct  its  business,  and  the 
general  supervision  and  management  of  its  affairs,  shall  reside  in  and 
be  exercised  by  a  board  of  directors.  (Rev.  Stat.  U.S.  sec.  5136.) 
This  statute  provides  for  the  election  of  a  president  of  the  board, 
and  otherwise  assures  that  the  directors  shall  act  unitedly  as  an 
organized  body.  The  election  of  an  individual  as  a  director  does 
not  constitute  him  an  agent  of  the  corporation  with  authority  to 
act  separately  and  independently  of  his  fellow-members.  It  is  the 
board  duly  convened  and  acting  as  a  unit  that  is  made  the  representa- 
tive of  the  company.  The  assent  or  determination  of  the  members  of 
the  board  acting  separately  and  individually  is  not  the  assent  of 
the  corporation.  The  law  proceeds  upon  the  theory  that  the  directors 
shall  meet  and  counsel  with  each  other,  and  that  any  determination 
affecting  the  corporation  shall  only  be  arrived  at  and  expressed  after 
a  consultation  at  a  meeting  of  the  board  -attended  by  at  least  a 
majority  of  its  members.  As  the  only  powers  conferred  upon  directors 
are  those  which  reside  in  them  as  a  board  and  when  acting  collectively 
as  such,  the  individual  consent  of  a  majority  of  the  members  acting 
separately  is  not  enough  to  ratify  the  unauthorized  appropriation  of 
the  money  of  the  bank  by  the  defendant.  (Angell  and  Ames  on 
Corporations,  sec.  504,  et  seq.;  Morawetz  on  Private  Corporations, 
sec.  247 ;  First  National  Bank  v.  Christopher,  n  Vroom,  435 ;  D'Arcy  v. 
Tamorac  Ry.  Co.,  Law  Rep.  2  Exc.  158;  Eagerly  v.  Emerson,  3  Foster, 
555;  Stoystown  &•  Greensburg  Turnpike  Road  Co.  v.  Craver,  45  Pa. 
St.  386;  Keeler  v.  Frost,  22  Barb.  400.) 

The  conclusion  which  we  have  reached  renders  it  unnecessary  to 
consider  the  other  questions  so  much  and  so  well  argued  by  counsel 
with  regard  to  the  relations  existing  between  the  cashier  and  the 
board  of  directors,  and  which  both  of  them  sustain  toward  the  bank, 


S42  LAW  AND  BUSINESS 

and  whether  the  doctrine  of  ratification  can  have  application  to  a 
transaction  wholly  between  the  board  of  directors  and  the  cashier. 

The  ruling  of  the  district  court  disallowing  the  plaintiff's  motion 
for  judgment  non  obstante  veredicto  will  be  reversed,  and  the  cause 
remanded  with  directions  to  enter  judgment  on  the  special  findings 
of  the  jury  for  the  additional  amount  appropriated  by  the  defendant 
without  authority  of  the  bank  as  interest  on  demand  certificates  of 
deposit,  in  accordance  with  the  plaintiff's  application. 

All  the  justices  concurring. 

QUESTIONS 

1.  What  constitutes  a  quorum  for  a  directors'  meeting?     Is  a  director 
entitled  to  vote  at  a  directors'  meeting  by  proxy  ? 

2.  Can  the  directors  bind  the  corporation  by  actions  taken  at  a  meeting 
held  in  a  state  other  than  the  state  in  which  the  corporation  was 
organized  ? 

3.  If  all  the  directors  individually  and  informally  assent  to  some  action 
of  the  corporation  or  its  agents  why  is  the  corporation  not  bound  by  the 
action  ? 

4.  X,  one  of  the  directors  of  the  D  Company,  executes  a  mortgage  on 
corporate  property  in  favor  of  C,  a  creditor  of  the  corporation.     What 
decision  in  proceedings  brought  to  foreclose  the  mortgage  ? 

5.  In  the  foregoing  case,  C  offers  evidence  tending  to  show  that  before 
the  mortgage  was  executed  he  consulted  the  other  directors  and  that 
they  informed  him  that  X  had  the  authority  to  execute  the  mortgage. 
What  decision  in  proceedings  to  foreclose  the  mortgage  ? 

CHICAGO  AND  NORTHWESTERN  RAILWAY 
COMPANY  v.  JAMES 

22  Wisconsin  Reports  194  (1867) 

DIXON,  C.  J.  The  court  instructed  the  jury,  "  that  if  P.  H.  Smith 
is  a  director  or  vice-president  of  the  company,  and,  in  point  of 
fact,  in  the  actual  charge  of  the  lands  of  the  company  appointing 
agents  to  protect  them  from  trespass,  or  to  sell  the  lands  or  timber, 
as  they  shall  be  advised,  and  the  jury  in  the  absence  of  testimony, 
may  presume  that  Smith  had  authority  to  the  extent  to  which  he 
assumed  to  act."  The  language  of  the  instruction  is  somewhat  inaccu- 
rate and  ambiguous,  and  there  are  doubtless  some  mistakes  either 
with  the  writer  or  printer.  The  words  "and  the  jury"  at  the  begin- 
ning of  the  last  clause  probably  should  read  "then  the  jury."  But 
with  this  correction,  the  ideas  of  the  judge  are  not  very  clearly 


MANAGEMENT  OF  THE  BUSINESS  UNIT  543 

expressed.  As  we  understand  the  instruction,  however,  it  was  in 
substance,  either  that  Mr.  Smith  as  director  or  vice-president  of  the 
company,  had  power,  ex  officio,  to  take  charge  of  the  lands,  and  to 
appoint  agents  to  protect  them  from  trespasses,  or  to  sell  them  or  the 
timber,  as  they  might  be  advised;  or  else,  that  being  such  director 
or  vice-president,  without  such  power  ex  officio,  yet  if  he  assumed 
to  have  it  and  did  take  actual  charge  of  the  lands  and  appoint  agents 
to  protect  them  from  trespasses,  or  to  sell  them  or  the  timber,  the 
jury  might  presume,  in  the  absence  of  testimony,  that  he  had  authority 
to  the  extent  to  which  he  thus  assumed  to  act.  Neither  proposition 
is  in  point  of  law  correct.  We  are  not  informed  as  to  what  the 
peculiar  powers  or  duties  of  a  director  or  vice-president  of  this  com- 
pany may  be  by  its  charter,  nor  do  we  care  to  examine.  It  is  enough 
that  no  such  extraordinary  powers  are  claimed  or  shown  to  have 
been  conferred  by  the  charter.  We  assume  that  a  director  possesses 
the  powers  usually  given  in  such  cases,  and  that  he  is  authorized 
to  act  as  a  member  of  the  board  in  all  matters  touching  the  business 
concerns  of  the  corporation  and  the  management  of  its  affairs;  but 
that,  when  not  acting  as  a  member  of  the  board,  he  had  no  authority 
to  represent  the  corporation,  or  to  bind  it  by  his  acts,  unless  author- 
ized by  some  proper  action  of  the  board,  in  which  case  he  acts  precisely 
like  any  other  agent  of  the  corporation,  and  upon  the  same  authority. 
And  so,  too,  of  the  vice-president.  We  consider,  that  his  duty,  in 
addition  to  that  imposed  upon  him  as  director,  is  to  preside  at  meetings 
of  the  board  in  the  absence  of  the  president.  The  principles  with 
regard  to  the  general  powers  and  duties  of  such  officers  are  elementary. 
In  Walsworth  County  Bank  v.  Farmers'  Loan  and  Trust  Co.,  14  Wis., 
325,  it  was  held  by  this  court  that  the  president  of  a  railroad  company 
had  no  power,  by  virtue  of  his  office  merely,  to  make  a  sale  of  the 
property  of  the  company;  and  his  is  certainly  an  office  of  more  dignity 
and  importance  than  that  of  a  vice-president  or  director.  See  that 
case,  and  the  authorities  there  cited,  and  also  Angell  and  Ames  on 
Corporations,  sections  299  to  302,  inclusive. 

As  to  the  other  proposition,  its  incorrectness  is  manifest  from 
what  has  already  been  said.  If  Mr.  Smith  had  no  ex  officio  power, 
then  his  authority  as  agent  must  be  shown  by  some  competent 
testimony,  the  same  as  that  of  any  other  agent;  and  it  cannot,  in  the 
absence  of  testimony,  be  presumed  from  the  mere  fact  that  he  assumed 
to  act  as  agent.  Such  authority  may  be  shown  in  various  ways:  as 
by  resolution  of  the  board  of  directors;  or  by  verbal  appointment 


544  LAW  AND  BUSINESS 

under  their  authority,  or  with  their  approbation;  or  by  proof  that 
Mr.  Smith  took  actual  charge  of  the  lands,  and  did  appoint  agents  to 
sell  them,  or  the  timber,  with  the  knowledge  of  the  directors,  who 
tacitly  acquiesced  or  took  no  action  to  prevent  it.  These,  or  some 
such  evidence  of  authority,  must  be  given  before  the  company  can  be 
bound.  The  mere  facts  that  Mr.  Smith  was  director  or  vice-president 
and  did  the  acts,  are  not  sufficient.  Previous  authority  must  be 
shown,  or  actual  knowledge  of  the  transactions  must  be  brought  home 
to  the  directors.  The  case  of  Bridgeport  Bank  v.  New  York  &  New 
Haven  Railroad  Co.,  30  Conn.,  231,  is  inapplicable,  for  the  reason  that 
there  the  act  complained  of  was  the  act  of  an  actual  agent  of  the 
company,  acting  within  the  scope  of  his  official  power.  The  same 
observation  may  be  made  of  several  of  the  other  cases  cited  by  counsel 
for  the  defendants.  The  rule  in  such  cases  is,  that  corporations,  like 
natural  persons,  are  bound,  and  bound  only  by  the  acts  and  con- 
tracts of  their  agents  done  and  made  within  the  scope  of  their  authority. 
As  the  judgment  must  for  these  reasons  be  reversed,  and  a  new  trial 
awarded,  it  becomes  unnecessary  for  us  to  examine  any  of  the  other 
numerous  exceptions  noted  in  the  bill. 

QUESTIONS 

1.  From  what  source  or  sources  do  the  various  officers  and  agents  of  a 
corporation  derive  their  powers  ? 

2.  What  powers  does  the  president  of  a  corporation  possess  by  virtue  of 
his  office  ?     What  powers  are  usually  conferred  upon  him  by  the  corpo- 
ration ? 

3.  What  powers  are  usually  conferred  upon  the  vice-president?  upon  the 
secretary  ? 

4.  What  powers  does  the  treasurer  of  a  corporation  possess  by  virtue  of 
his  office?    What   powers  are   usually   conferred   upon   him   by   the 
corporation  ? 

5.  The  directors  of  a  corporation,  acting  under  authority,  vest  the  manage- 
ment of  the  corporation  in  a  general  manager.     What  powers  does  this 
officer  possess  by  virtue  of  his  office  ? 

6.  Does  a  partnership  have  officers  comparable  to  those  of  a  corporation  ? 
Does  a  partnership  conduct  its  affairs  through  agents  as  a  corporation 
does? 


MANAGEMENT  OF  THE  BUSINESS  UNIT  545 

3.     Duties  of  Members  and  Representatives  in  Management 

SMITH  v.  HURD 
12  Metcalf's  Massachusetts  Reports  371  (1847) 

This  was  a  special  action  on  the  case,  by  a  stockholder  of  the 
Phoenix  Bank,  against  those  who  were  directors  of  the  said  bank,  for 
several  years  next  before  and  at  the  time  of  the  failure  of  said  bank, 
in  October,  1842.  There  were  two  counts:  one  founded  in  non- 
feasance  of  official  duty  and  the  other  in  misfeasance. 

The  defendants  demurred  to  the  declaration,  and  the  plaintiff 
joined  in  demurrer. 

SHAW,  C.  J.  This  is  certainly  a  case  of  first  impression.  We 
are  not  aware  that  any  similar  action  has  been  sustained  in  England, 
or  in  any  of  the  courts  of  this  country.  It  is  founded  on  no  statute. 
It  is  an  action  on  the  case,  at  common  law,  brought  by  an  individual 
holder  of  shares  in  an  incorporated  bank,  against  the  directors,  not 
including  the  president,  setting  forth  various  acts  of  negligence  and 
malfeasance  through  a  series  of  years,  in  consequence  of  which,  as 
the  declaration  alleges,  the  whole  capital  of  the  bank  was  wasted  and 
lost,  and  the  shares  of  the  plaintiff  became  of  no  value.  The  circum- 
stance that  no  such  action  has  been  maintained  would  certainly  be 
no  decisive  objection,  if  it  could  be  shown  to  be  maintainable  on 
principle.  But  the  fact,  that  similar  grievances  have  existed  to  a 
great  extent,  and  in  numberless  instances  where  such  an  action  would 
have  presented  an  obvious  and  effective  remedy,  affords  strong 
proof,  that  in  the  view  of  all  such  suffering  parties,  and  their  legal 
advisers  and  guides,  there  was  no  principle  on  which  such  an  action 
can  be  maintained. 

If  an  action  can  be  brought  by  one  stockholder,  it  may  be  brought 
by  the  holder  of  a  single  share;  so  that  for  one  and  the  same  default 
of  these  directors,  thirty-five  hundred  actions  might  be  brought. 
If  it  may  be  sustained  by  proof  of  an  act,  or  series  of  acts,  of  careless- 
ness, neglect,  and  breach  of  duty  in  managing  the  affairs  of  the 
bank,  by  which  the  whole  value  of  the  stock  is  destroyed,  it  may,  on 
the  same  principle,  be  maintained  on  any  act  or  instance  of  such 
negligence,  by  which  the  shares  are  diminished  in  value,  50,  10,  5,  or 
i  per  cent.  Still,  notwithstanding  these  consequences,  if  the  plaintiff 
has  a  good  right  of  action,  upon  recognized  and  sound  legal  principle 
his  action  ought  to  be  sustained. 


546  LAW  AND  BUSINESS 

But  the  court  is  of  opinion  that  the  action  cannot  be  maintained 
and  that  on  several  grounds,  a  few  of  the  more  prominent  of  which 
may  be  alluded  to. 

1.  There  is  no  legal  privity,  relation,  or  immediate  connection 
between  the  holders  of  shares  in  a  bank,  in  their  individual  capacity, 
on  the  one  side,  and  the  directors  of  the  bank  on  the  other.     The 
directors  are  not  the  bailees,  the  factors,  agents,  or  trustees  of  such 
individual    stockholders.     The    bank    is    a    corporation    and    body 
politic,  having  a  separate  existence  as  a  distinct  person  in  law,  in 
whom  the  whole  stock  and  property  of  the  bank  are  vested,  and  to 
whom  all  agents,  debtors,  officers,  and  servants  are  responsible  for  all 
contracts,  express  or  implied,  made  in  reference  to  such  capital,  and 
for  all  torts  and  injuries  diminishing  or  impairing  it.     The  very 
purpose  of  incorporation,  is  to  create  such  legal  and  ideal  person  in 
law,  distinct  from  all  the  persons  composing  it,  in  order  to  avoid  the 
extreme  difficulty  of  such  a  number  of   persons  acting  together  in 
their  individual  capacities.     The  practical  difficulty  would  be  nearly 
as  great  whether  it  were  held  that  all  must  join  in  an  action  to  recover 
damage  for  an  injury  to  the  common  property,  or  that  each  might 
sue  separately. 

The  stockholders  do,  indeed,  ordinarily  elect  the  directors;  but 
it  is  as  parts  and  members  of  the  corporation,  in  their  corporate 
capacity,  in  modes  pointed  out  by  the  charter  and  by-laws,  so  that 
the  directors  are  the  appointees  of  the  corporation,  not  of  the  indi- 
viduals. Indeed,  I  believe  there  is  a  provision  in  the  bank  charters — 
there  certainly  was  formerly — which  is  equally  to  the  present  purpose; 
namely,  that  the  Commonwealth  shall  be  at  liberty  to  add  a  certain 
amount  to  the  capital  of  various  banks,  and  appoint  a  proportional 
number  of  directors.  Such  directors,  so  appointed,  pursuant  to  the 
charter  regulating  the  legal  organization  of  the  body,  would  stand  in 
all  respects  on  the  footing  of  directors  chosen  by  the  stockholders.  If 
these  were  liable  to  the  action  of  individual  stockholders,  those  would 
be  in  like  manner. 

2.  The  individual  members  of  the  corporation,   whether  they 
should  all  join,  or  each  act  severally,  have  no  right  or  power  to  inter- 
meddle with  the  property  or  concerns  of  the  bank,  or  call  any  officer, 
agent,  or  servant  to  account,  or  discharge  them  from  any  liability. 
Should  all  the  stockholders  join  in  a  power  of  attorney  to  anyone  he 
could  not  take  possession  of  any  real  or  personal  estate,  any  security 
or  chose  in  action;   could  not  collect  a  debt  or  discharge  a  claim,  or 


MANAGEMENT  OF  THE  BUSINESS  UNIT  547 

release  damage  arising  from  any  default;  simply  because  they  are  not 
the  legal  owners  of  the  property,  and  damage  done  to  such  property 
is  not  an  injury  to  them.  Their  rights  and  their  powers  are  limited 
and  well  defined.  They  are  members  of  an  organized  body,  and 
exercise  such  powers  as  the  organization  of  the  institution  gives 
them.  Stockholders  in  banks  have  a  separate  right  to  dividends,  when 
declared,  and  to  a  distributive  share  of  the  capital  stock,  if  any  remains 
when  the  charter  of  the  bank  is  at  an  end,  and  its  debts  paid. 

3.  But  another  important  consideration  is,  that  the  injury  done 
to  the  capital  stock  by  wasting,  impairing,  and  diminishing  its  value, 
is  not,  in  the  first  instance,  nor  necessarily,  a  damage  to  the  stock- 
holders.    All  sums  which  could,  in  any  form,  be  recovered  on  that 
ground,  would  be  assets  of  the  corporation,  and  when  collected  and 
received  by  directors,  receivers,  or  any  other  persons  entitled  to 
receive  the  same,  they  would  be  held  in  trust,  first  to  redeem  the 
bills  and  pay  the  debts  of  the  bank;  and  it  would  be  only  after  these 
debts  were  paid,  and  in  case  any  surplus  should  remain,  that  the 
stockholders  would  be  entitled  to  receive  anything.     It  is,  therefore, 
an  indirect,  contingent,  and  subordinate  interest,  which  each  stock- 
holder has,  in  damages,  so  to  be  recovered  against  directors.     If,  upon 
such   indirect,   contingent,  *  and   remote   interest,   individual   stock- 
holders could  recover  for  the  defaults  of  directors,  and  especially,  as 
is  alleged  in  this  case,  where  the  defaults  have  been  so  great  as  to 
sink  the  capital,  a  fortiori  would  the  creditors  of  the  bank  individually 
have  a  right  to  maintain  similar  actions;  because  their  claim  upon  the 
funds,  being  prior  to  that  of  stockholders,  would  be  somewhat  more 
immediate  and  direct.     In  the  same  connection  it  is  obvious  to  remark, 
that  a  judgment  in  favor  of  one  stockholder  would  be  no  bar  to  an 
action  by  a  creditor,  nor  a  judgment  by  both,  to  an  action  by  the 
corporation. 

4.  But  it  is  said,  that  although  the  real  and  personal  estate,  the 
securities  and  capital  stock,  are,  in  legal  contemplation,  vested  in  the 
corporation,  yet  the  individual  has  a  separate  and  distinct  property 
and  interest  in  his  particular  shares,  by  any  injury  to  which  he  may 
have  a  separate  damage.    To  some  extent,  it  is  true  that  he  has  a 
several  interest  in  his  shares;  but  it  is  to  be  taken  with  some  qualifica- 
tions.    Strictly  speaking,  shares  in  a  bank  do  not  constitute  a  legal 
estate  and  property;   it  is  rather  a  limited  and  qualified  right  which 
the  stockholder  has  to  participate,  in  a  certain  proportion,  in  the 
benefits  of  a  common  fund, vested  in  a  corporation  for  the  common  use; 


548  LAW  AND  BUSINESS 

it  is  a  qualified  and  equitable  interest,  a  valuable  interest  manifested 
usually  by  a  certificate,  which  is  transferable.  To  the  extent  of  this 
separate  and  peculiar  interest,  a  stockholder,  no  doubt,  might  main- 
tain his  separate  and  special  action,  according  to  the  nature  of  the 
wrong  done  to  him  in  respect  to  it;  as  trover  or  trespass,  for  the 
conversion  or  tortious  taking  of  his  certificate;  trespass  on  the  case  for 
refusing  to  make  a  transfer  on  a  proper  occasion;  assumpsit  for  a 
dividend  declared  and  the  like.  But  an  injury  done  to  the  stock  and 
capital,  by  negligence  or  misfeasance,  is  not  an  injury  to  such  separate 
interest,  but  to  the  whole  body  of  stockholders  in  common.  It  is 
like  the  case  of  a  common  nuisance,  where  one  who  suffers  a  special 
damage,  peculiar  to  himself  and  distinguishable  in  kind  from  that 
which  he  shares  in  the  common  injury,  may  maintain  a  special  action. 
Otherwise,  he  cannot.  Co.  Lit.  s6a;  3  Steph.  N.P.  2372;  Lansing  v. 
Smith,  8  Cow.  (N.Y.)  146. 

But  we  are  pressed  with  the  argument,  that  for  every  damage 
which  one  sustains,  which  is  caused  by  the  wrongful  act  of  another, 
he  ought  to  have  a  remedy.  .  This  is  far  from  being  universally  true. 
Another  maxim  in  regard  to  claims  for  damage  is,  causa  proxima,  non 
remota,  spectatur.  Thousands  of  instances  occur,  in  which  one 
sustains  consequential  and  incidental  damage  from  the  misconduct 
of  another,  without  a  remedy  at  law.  By  the  misconduct  of  the 
officers  or  agents  of  a  parish,  town,  county,  or  even  of  the  state  or 
the  Union  defalcations  may  take  place,  treasure  be  squandered  and 
wasted,  and  all  the  members  of  the  respective  aggregate  bodies  suffer 
damage,  for  which  the  law,  from  the  nature  of  the  case,  can  afford 
no  direct  remedy.  But  the  true  answer  to  the  objection  is,  that 
stockholders  have  a  remedy,  a  theoretic  one  indeed  and  perhaps 
often  inadequate,  in  the  power  of  the  corporation,  in  its  corporate 
capacity,  to  obtain  redress  for  injuries  done  to  the  common  property 
by  the  recovery  of  damages;  and  each  individual  stockholder  has  his 
remedy  through  the  powers  thus  vested  in  the  corporation,  for  the 
common  benefit. 

On  the  whole,  the  court  is  of  opinion  that  the  demurrer  is  well 
taken,  and  that  the  action  cannot  be  maintained. 

QUESTIONS 

1.  Do  you  infer  from  the  decision  in  the  principal  case  that  the  plaintiff 
has  no  remedy  against  the  directors  of  his  corporation  ? 

2.  If  a  wrong  was  committed  in  this  case,  against  whom  was  it  committed  ? 
Who  should  have  brought  proceedings  for  redressing  the  wrong  ? 


MANAGEMENT  OF  THE  BUSINESS  UNIT  549 

3.  Upon  what  theory  did  the  court  deny  relief  to  the  plaintiff  in  this  case? 
Would  the  same  conclusion  have  been  reached  if  the  action  had  been 
brought  by  all  the  stockholders  of  the  corporation  ? 

4.  What  remedy  does  a  partner  have  against  his  copartners  if  he  can  show 
that  his  copartners  are  mismanaging  the  affairs  of  the  firm  ? 

5.  D,  a  director  of  the  X  Company,  bought  ten  shares  of  stock  from  S,  a 
stockholder  in   the  X  Company,  at  ninety  dollars  a  share,  without 
disclosing  to  S  that  valuable  mineral  deposits  had  just  been  discovered 
on  the  land  of  the  corporation.     When  this  information  became  public 
the  market  value  of  the  stock  went  above  par.     What  are  the  rights 
of  S,  if  any,  against  D  ? 

ROTHCHILD  v.  MEMPHIS  AND  CHARLESTON  RAILROAD 

COMPANY 

113  Federal  Reports  476  (1902) 

WANTY,  D.  J.  The  proofs  in  this  case  fail  to  show  any  actual 
fraud  on  the  part  of  the  Southern  Railway  Co.  before  or  at  the  sale, 
or  any  actual  control  by  it  of  the  Memphis  &  Charleston  Railroad. 
The  road  was  in  the  hands  of  receivers  appointed  by  the  court  from 
July  14,  1892,  until  the  sale  was  made  on  the  twenty-sixth  of  Febru- 
ary, 1898.  The  defendant  Southern  Railway  Co.  was  not  organized 
until  1894,  and  there  is  nothing  in  the  proofs  from  which  any  manipu- 
lation of  the  affairs  of  the  Memphis  &  Charleston  Railroad  by  the 
Southern  Railway  Co.  since  its  organization,  or  by  its  stockholders 
before  its  organization,  can  be  inferred.  The  relief,  in  the  absence  of 
this  proof,  must  be  founded  on  the  allegations  in  the  bill 

that  the  relations  of  said  Southern  Railway  Company  and  of  your  orator 
and  the  other  stockholders  of  said  Memphis  &  Charleston  Railroad  Co. 
at  the  time  when  said  sale  took  place  (the  said  Memphis  &  Charleston 
Railroad  Co.  having  abdicated  its  functions  of  controlling  said  property, 
and  it  and  its  board  of  directors  being  entirely  under  the  control  of  the 
Southern  Railway  Co.)  were  the  same  as  those  of  tenants  in  common,  and 
the  said  Southern  Railway  Co.  could  not  acquire  any  right,  title,  or  interest 
in  the  said  property,  except  for  the  equal  and  common  benefit  of  itself  and 
the  other  stockholders  of  said  Memphis  &  Charleston  Railroad  Co.,  and 
the  Southern  Railway  Co.,  a  foreign  corporation,  did  not  have  the  right  in 
law  to  become  the  purchaser  of  the  Memphis  &  Charleston  Railroad 
Company's  property. 

I.  Stockholders  are  not  tenants  in  common  of  the  property  of 
the  corporation,  and  a  stockholder,  as  such,  even  though  he  owns  a 
majority  of  the  stock,  does  not  occupy  a  trust  relation  toward  the 


550  LAW  AND  BUSINESS 

other  stockholders,  and  he  may  deal  with  them  or  with  the  corpora- 
tion in  good  faith.  In  order  to  establish  a  trust  relation,  the  majority 
stockholder  must  actually  control  the  affairs  of  the  company  for  his 
own  benefit  and  to  the  prejudice  of  the  minority  stockholders.  If  he 
is  not  in  control  of  the  property,  and  does  not  mismanage  it  to  the 
prejudice  of  the  minority  stockholders,  he  may  purchase,  if  there  is 
no  actual  fraud,  the  property  of  the  corporation  at  a  judicial  sale  for 
his  own  benefit,  and  he  is  not  accountable  to  any  other  stockholder 
for  the  property  so  purchased.  In  Mickles  v.  Bank,  n  Paige,  127, 
128,  42  Am.  Dec.  103,  CHANCELLOR  WALWORTH  uses  this  language, 
which  seems  apt  when  applied  to  the  facts  here,  and  has  been  indorsed 
by  courts  and  text  writers: 

The  principal  object  of  the  bill  appears  to  be  to  set  aside  the  sales  of  the 
property  of  the  corporation  upon  the  ground  that  the  sales  were  invalid. 
In  this  the  complainant  must  necessarily  fail  upon  the  allegations  of  the 
bill,  even  if  the  corporation  is  made  a  paity,  for  the  sales  were  valid,  and 
gave  a  good  title  to  the  purchaser.  And  one  stockholder  of  a  corporation 
has  a  perfect  right  to  become  a  purchaser,  for  his  own  benefit,  at  a  sheriff's 
sale  of  the  corporate  property  upon  an  execution  against  the  corporation ; 
nor  is  he  accountable  to  any  other  stockholder  for  such  property  if  there  is 
no  fraud  in  the  sale,  even  where  the  property  is  bought  in  by  him  much 
below  its  value.  The  remedy  of  the  other  stockholders  is  to  attend  the  sale 
upon  the  executions,  and  bid  up  the  property  to  its  cash  value,  and  thus 
prevent  the  same  from  being  sacrificed.  The  stockholders  of  a  corporation 
are  neither  tenants  in  common  of  the  corporate  property  nor  copartners, 
either  before  or  after  the  dissolution  of  the  corporation. 

There  is  nothing  in  the  proof  in  this  case  from  which  it  can  be 
found  that  the  Southern  Railway  Co.  ever  operated  or  controlled 
the  property  of  the  Memphis  &  Charleston  Railroad  Co.,  so  that 
no  mismanagement  of  its  corporate  affairs  for  the  purpose  of  obtaining 
advantage  at  the  expense  of  the  minority  stockholders  can  be  attrib- 
uted to  it.  The  sale  of  the  property  was  not  brought  about  through 
its  manipulation,  and  it  is  not  shown  that  the  property  did  not  bring 
a  fair  price.  If  the  minority  stockholders  desired  to  become  pur- 
chasers, they  could  have  devised  a  plan  of  reorganization,  and  bid  in 
the  property  if  it  did  not  bring  what  they  thought  was  its  full  value 
at  the  sale.  Oil  Co.  v.  Marbury,  91  U.S.  587,  23  L.  Ed.  328.  This 
the  complainant  did  not  do,  but  waited  until  after  the  sale  had  been 
made  and  confirmed,  and  the  purchaser  had  been  in  possession  of  and 
operating  the  property  from  February  26,  1898,  until  August  7,  1899, 
when  he  filed  this  bill,  the  allegations  of  which  would,  if  action  had 


MANAGEMENT  OF  THE  BUSINESS  UNIT  551 

been  promptly  taken,  have  brought  the  defendant  Southern  Railway 
Co.  within  the  principles  laid  down  in  the  cases  holding  the  majority 
stockholder  a  trustee  in  the  purchase  of  the  corporate  property  for  the 
benefit  of  all  of  the  stockholders  of  the  corporation.  But  the  proofs 
lack  the  essential  elements  of  control  and  mismanagement,  without 
which  the  relief  could  not  be  given,  even  if  the  bill  had  been  seasonably 
filed.  The  allegations  of  control,  mismanagement,  and  fraud  are 
emphasized  throughout  the  bill  of  complaint,  but  seem  to  be  wholly 
lacking  in  the  proof,  the  complainant  apparently  relying  on  the 
position  that,  when  it  is  shown  that  a  person  holding  a  majority  of 
the  stock  of  a  corporation  purchases  all  of  its  property,  there  is  a 
presumption  of  fraud  which  makes  him  a  trustee  for  all  of  the  stock- 
holders, and  proof  of  fraud  becomes  unnecessary.  No  case  in  the 
large  number  cited  by  counsel  for  the  complainant  justifies  this  posi- 
tion. In  each  one  there  had  been  actual  fraud  in  the  control  and 
mismanagement  of  the  property  for  the  purpose  of  bringing  about 
its  acquisition  by  the  majority  stockholder.  It  is  true  that  every 
transaction  of  a  majority  stockholder  with  the  corporation  will  be 
viewed  by  the  courts  with  jealousy,  and  set  aside  on  slight  grounds; 
but  it  is  not  void,  and,  if  the  relations  of  the  majority  stockholder  are 
fair  and  open,  there  is  no  rule  which  forbids  his  dealing  with  the 
corporation,  and  no  presumption  that  such  dealing  is  fraudulent. 
The  actual  control  of  the  property,  which  is  the  basis  in  all  of  the 
cases  of  the  trust  relation,  not  existing,  and  the  sale  not  having  been 
brought  about  by  the  fraudulent  action  of  the  defendant,  it  did  not, 
by  its  purchase,  become  a  trustee  for  the  complainant  and  other 
stockholders  of  the  Memphis  &  Charleston  Railroad  Co.  Oil  Co.  v. 
Marbury,  91  U.S.  587,  23  L.  Ed.  328;  McKittrick  v.  Railroad  Co., 
152  U.S.  473,  14  Sup.  Ct.  661,  38  L.  Ed.  518;  Rogers  v.  Railway  Co., 
33  C.C.A.  517,  91  Fed.  313;  Gillett  v.  Bowen  (C.C.)  23  Fed.  625; 
Lucas  v.  Friant,  in  Mich.  426,  69  N.W.  735;  Bank  v.  Walker,  66  N.Y. 
424;  Spurlock  v.  Railway  Co.,  90  Mo.  200,  2  S.W.  219;  Price  v. 
Holcomb,  89  Iowa,  123,  56  N.W.  735;  Bank  v.  Walker,  66  N.Y.  424; 
Spurlock  v.  Railway  Co.,  90  Mo.  200,  2  S.W.  219;  Price  v.  Holcomb, 
89  Iowa,  123,  56  N.W.  407;  Thompson,  Corporations,  sections  1071, 
1076,  1079;  Cook,  Corporations,  sections  6,  653. 

There  is  nothing  in  the  case  of  Farmers'  Loan  6°  Trust  Co.  v. 
New  York  &  N.R.  Co.,  150  N.Y.  410,  44  N.E.  1043,  34  L.R.A.  76, 
55  Am.  St.  Rep.  689,  which  is  relied  upon  by  this  complainant,  at 
variance  with  these  views.  In  that  case  the  New  York  Central  & 


552  LAW  AND  BUSINESS 

Hudson  River  Railroad  Co.  purchased  a  majority  of  the  stock  and 
bonds  of  the  New  York  &  Northern  Railway  Co.,  and  while  its  officers 
were  in  control  of  the  New  York  &  Northern  Railway  Co.  they  declined 
to  accept  traffic  from  other  roads  that  would  have  produced  a  fund 
with  which  to  pay  the  interest  on  the  bonds;  the  income  of  the  road 
which  should  have  been  employed  to  pay  the  interest  was  diverted 
to  other  and  improper  purposes,  which  action  occasioned  the  inability 
of  the  company  to  meet  its  obligations,  the  default  in  which  resulted  in 
the  foreclosure  suit.  After  making  an  elaborate  review  of  the  authori- 
ties, JUDGE  MARTIN,  for  the  court,  states  the  rule  as  follows: 

"The  principle  of  the  authorities  renders  it  quite  obvious  that  a 
corporation  purchasing  a  majority  of  the  stock  of  another  competing 
one  cannot  obtain  control  of  its  affairs,  divert  the  income  of  its 
business,  refuse  business  which  would  enable  the  defaulting  company 
to  pay  its  interest,  and  then  institute  an  action  in  equity  to  enforce 
its  obligations,  for  the  avowed  purpose  of  obtaining  entire  control  of 
its  property  to  the  injury  of  the  minority  stockholders." 

The  elements  of  control  and  mismanagement  there  existed,  and 
were  the  basis  upon  which  the  judgment  rested,  and  will  be  found 
in  the  cases  reviewed  by  JUDGE  MARTIN,  and  in  the  cases  urged  by 
counsel  for  complainant  here.  Their  absence  in  this  case  is  fatal 
to  the  appellant's  contention. 

II.  The  minority  stockholders,  as  the  proof  shows,  with  the  full 
knowledge  of  all  of  the  proceedings  culminating  in  the  sale,  made  no 
objection,  but  permitted  the  property  to  be  sold  to  the  Southern 
Railway  Co.  for  a  large  sum,  and  that  company  to  expend  a  large 
amount  of  money  in  its  improvement,  without  making  any  effort  to 
impeach  the  sale  until  the  filing  of  this  bill.  There  is  no  excuse  given 
for  this  delay,  and  the  complainant  would  have  thereby  lost  any 
right  to  the  relief  sought,  if  he  ever  had  any.  Oil  Co.  v.  Marbury, 
91  U.S.  591,  592,  23  L.  Ed.  328;  Simmons  v.  Railroad  Co.,  159  U.S.  278, 
16  Sup.  Ct.  i,  40  L.  Ed.  150;  Miles  v.  Vivian,  25  C.C.A.  208,  79 
Fed.  848-53;  Harwood  v.  Railroad  Co.,  17  Wall.  81,  21  L.  Ed.  558. 
In  the  case  of  Oil  Co.  v.  Marbury  above  cited,  JUSTICE  MILLER  says: 

"The  doctrine  is  well  settled  that  the  option  to  avoid  such  a  sale 
must  be  exercised  within  a  reasonable  time.  This  has  never  been 
held  to  be  any  determined  number  of  days  or  years  as  applied  to 
every  case,  like  the  statute  of  limitations,  but  must  be  decided  in  each 
case  upon  all  the  elements  of  it  which  affect  that  question." 

The  decree  dismissing  the  bill  was  correct,  and  it  is  affirmed. 


MANAGEMENT  OF  THE  BUSINESS  UNIT  553 

QUESTIONS 

1.  S,  holder  of  stock  in  the  X  Company,  sells  property  to  the  corporation 
at  a  gross  over- valuation.    The  corporation  asks  that  the  transaction  be 
declared  void  as  against  it.     What  decision  ? 

2.  S  enters  into  a  business  in  competition  with  the  business  of  his  corporation 
and  makes  large  profits  in  it.     The  corporation  asks  that  he  be  compelled 
to  account  for  such  profits.     What  decision  ? 

3.  S  buys  a  promissory  note  against  his  corporation  at  a  discount  and  brings 
action  on  it  for  its  face  value.     The  corporation  contends  that  he  can 
recover  from  it  only  the  amount  paid  for  the  note.     What  decision  ? 

4.  The  X  Company  was  the  holder  of  a  valuable  lease  which  it  expected  to 
renew  upon  the  expiration  of  the  lease.     S,  without  the  knowledge  or 
consent  of  the  corporation,  secured  a  lease  on  the  property  in  his  own 
name  and  offered  it  to  the  corporation  at  an  advanced  rental.     What 
are  the  rights  of  the  corporation,  if  any,  against  S  ? 

HUN  v.  GARY 
82  New  York  Reports  65  (1880) 

These  were  cross-appeals.  The  defendants,  Gary,  and  others 
appealed  from  judgment  of  the  General  Term  of  the  Supreme  Court, 
in  the  first  judicial  department,  affirming,  as  to  them,  a  judgment 
in  favor  of  plaintiff  entered  upon  a  verdict,  and  affirming  an  order 
denying  a  motion  for  a  new  trial.  The  plaintiff  appealed  from  an 
order  of  said  General  Term  reversing  its  judgment  as  to  defendant 
Smith,  and  granting  a  new  trial. 

EARL,  J.  This  action  was  brought  by  the  receiver  of  the  Central 
Savings  Bank  of  the  city  of  New  York,  against  the  defendants,  who 
were  trustees  of  the  bank,  to  recover  damages  which,  it  is  alleged, 
they  caused  the  bank  by  their  misconduct  as  such  trustees. 

The  first  question  to  be  considered  is  the  measure  of  fidelity, 
care,  and  diligence  which  such  trustees  owe  to  such  a  bank  and  its 
depositors.  The  relation  existing  between  the .  corporation  and  its 
trustees  is  mainly  that  of  principal  and  agent,  and  the  relation  between 
the  trustees  and  the  depositors  is  similar  to  that  of  trustee  and  cestui 
que  trust.  The  trustees  are  bound  to  observe  the  limits  placed  upon 
their  powers  in  the  charter,  and  if  they  transcend  such  limits  and  cause 
damage,  they  incur  liability.  If  they  act  fraudulently-  or  do  a  wilful 
wrong,  it  is  not  doubted  that  they  may  be  held  for  all  the  damage 
they  cause  to  the  bank  or  its  depositors.  But  if  they  act  in  good 
faith  within  the  limits  of  powers  conferred,  using  proper  prudence 


554  LAW  AND  BUSINESS 

and  diligence,  they  are  not  responsible  for  mere  mistakes  or  errors 
of  judgment.  That  the  trustees  of  such  corporations  are  bound  to 
use  some  diligence  in  the  discharge  of  their  duties  cannot  be  disputed. 
All  the  authorities  hold  so.  What  degree  of  care  and  diligence  are 
they  bound  to  exercise  ?  Not  the  highest  degree,  not  such  as  a  very 
vigilant  or  extremely  careful  person  would  exercise.  If  such  were 
required,  it  would  be  difficult  to  find  trustees  who  would  incur  the 
responsibility  of  such  trust  positions.  It  would  not  be  proper  to 
answer  the  question  by  saying  the  lowest  degree.  Few  persons  would 
be  willing  to  deposit  money  in  savings  banks  or  to  take  stock  in 
corporations,  with  the  understanding  that  the  trustees  or  directors 
were  bound  only  to  exercise  slight  care,  such  as  inattentive  persons 
would  give  to  their  own  business,  in  the  management  of  the  large 
and  important  interests  committed  to  their  hands.  When  one 
deposits  money  in  a  savings  bank,  or  takes  stock  in  a  corporation, 
thus  divesting  himself  of  the  immediate  control  of  his  property,  he 
expects,  and  has  the  right  to  expect,  that  the  trustees  or  directors, 
who  are  chosen  to  take  his  place  in  the  management  and  control  of 
his  property,  will  exercise  ordinary  care  and  prudence  in  the  trusts 
committed  to  them — the  same  degree  of  care  and  prudence  that  men 
prompted  by  self-interest  generally  exercise  in  their  own  affairs. 
When  one  voluntarily  takes  the  position  of  trustee  or  director  of  a 
corporation,  good  faith,  exact  justice,  and  public  policy  unite  in 
requiring  of  him  such  a  degree  of  care  and  prudence,  and  it  is  a  gross 
breach  of  duty — crassa  negligentia — not  to  bestow  them. 

It  is  impossible  to  give  the  measure  of  culpable  negligence  for  all 
cases,  as  the  degree  of  care  required  depends  upon  the  subjects  to 
which  it  is  to  be  applied.  (First  National  Bank  v.  Ocean  National 
Bank,  60  N.Y.  278.)  What  would  be  slight  neglect  in  the  care  of  a 
quantity  of  iron  might  be  gross  neglect  in  the  care  of  a  jewel.  What 
would  be  slight  neglect  in  the  care  exercised  in  the  affairs  of  turnpike 
corporation,  or  even  of  a  manufacturing  corporation,  might  be  gross 
neglect  in  the  care  exercised  in  the  management  of  a  savings  bank 
intrusted  with  the  savings  of  a  multitude  of  poor  people,  depending 
for  its  life  upon  credit  and  liable  to  be  wrecked  by  the  breath  of 
suspicion.  There  is  a  classification  of  negligence  to  be  found  in  the 
books,  not  always  of  practical  value  and  yet  sometimes  serviceable, 
into  slight  negligence,  gross  negligence  and  that  degree  of  negligence 
intermediate  the  two,  attributed  to  the  absence  of  ordinary  care; 
and  the  claim  on  behalf  of  these  trustees  is  that  they  can  only  be  held 


MANAGEMENT  OF  THE  BUSINESS  UNIT  555 

responsible  in  this  action  in  consequence  of  gross  negligence,  according 
to  this  classification.  If  gross  negligence  be  taken  according  to  its 
ordinary  meaning — as  something  nearly  approaching  fraud  or  bad 
faith — I  cannot  yield  to  this  claim;  and  if  there  are  any  authorities 
upholding  the  claim,  I  emphatically  dissent  from  them. 

It  seems  to  me  that  it  would  be  a  monstrous  proposition  to  hold 
that  trustees,  intrusted  with  the  management  of  the  property,  inter- 
ests, and  business  of  other  people,  who  divest  themselves  of  the 
management  and  confide  in  them,  are  bound  to  give  only  slight  care 
to  the  duties  of  their  trust,  and  are  liable  only  in  case  of  gross  inatten- 
tion and  negligence;  and  I  have  found  no  authority  fully  upholding 
such  a  proposition.  It  is  true  that  authorities  are  found  which  hold 
that  trustees  are  liable  only  for  crassa  negligentia,  which  literally 
means  gross  negligence ;  but  that  phrase  has  been  defined  to  mean  the 
absence  of  ordinary  care  and  diligence  adequate  to  the  particular 
case.  In  Scott  v.  De  Peyster  (i  Edw.  Ch.  513,  543) — a  case  much 
cited — the  learned  VICE-CHANCELLOR  said:  "I  think  the  question  in 
all  such  cases  should  and  must  necessarily  be,  whether  they  [directors] 
have  omitted  that  care  which  men  of  common  prudence  take  of  their 
own  concerns.  To  require  more,  would  be  adopting  too  rigid  a 
rule  and  rendering  them  liable  for  slight  neglect;  while  to  require 
less,  would  be  relaxing  too  much  the  obligation  which  binds  them 
to  vigilance  and  attention  in  regard  to  the  interests  of  those  confided 
to  their  care,  and  expose  them  to  liability  for  gross  neglect  only — 
which  is  little  short  of  fraud  itself."  In  Spering's  Appeal  (71  Penn. 
St.  1 1)  JUDGE  SHARSWOOD  said :  "  They  [directors]  can  only  be  regarded 
as  mandataries — persons  who  have  gratuitously  undertaken  to  per- 
form certain  duties,  and  who  are,  therefore,  bound  to  apply  ordinary 
skill  and  diligence,  but  no  more."  In  Hodges  v.  New  England  Screw 
Co.  (i  R.I.  312)  JENCKES,  J.,  said:  "The  sole  question  is  whether  the 
directors  have  or  have  not  bestowed  proper  diligence.  They  are 
liable  only  for  ordinary  care;  such  care  as  prudent  men  take  in  their 
own  affairs."  And  in  the  same  case,  AMES,  J.,  said;  "They  should 
not,  therefore,  be  liable  for  innocent  mistakes,  unintentional  negli- 
gence, honest  errors  of  judgment,  but  only  for  wilful  fraud  or  neglect, 
and  want  of  ordinary  knowledge  and  care."  The  same  case  came 
again  under  consideration  in  3  R.I.  9,  and  GREEN,  CH.  J.,  said:  "We 
think  a  board  of  directors,  acting  in  good  faith  and  with  reasonable 
care  and  diligence,  who  nevertheless  fall  into  a  mistake,  either  as  to 
law  or  fact,  are  not  liable  for  the  consequences  of  such  mistake." 


556  LAW  AND  BUSINESS 

In  the  case  of  The  Liquidators  of  the  Western  Bank  v.  Douglas  (n 
Session  Cases)  (3d  series)  112  (Scotch),  it  is  said:  " Whatever  the 
duties  [of  directors]  are,  they  must  be  discharged  with  fidelity  and 
conscience,  and  with  ordinary  and  reasonable  care.  It  is  not  necessary 
that  I  should  attempt  to  define  where  excusable  remissness  and  a  gross 
negligence  begin.  That  must  depend  to  a  large  extent  on  the 
circumstances.  It  is  enough  to  say  that  gross  negligence  in  the 
performance  of  such  a  duty,  the  want  of  reasonable  and  ordinary 
fidelity  and  care,  will  impose  liability  for  loss  thereby  occasioned." 
In  The  Charitable  Corporation  v.  Sutton  (2  Atkyns,  405)  LORD 
CHANCELLOR  HARDWICKE  said,  that  a  person  who  accepted  the 
office  of  director  of  a  corporation  "is  obliged  to  execute  it  with  fidelity 
and  reasonable  diligence,"  although  he  acts  without  compensation. 
In  Litchfield  v.  White  (3  Sandf.  545)  SANDFORD,  J.,  said:  "In  general, 
a  trustee  is  bound  to  manage  and  employ  the  trust  property  for  the 
benefit  of  the  cestui  que  trust  with  the  care  and  diligence  of  a  provident 
owner.  Consequently  he  is  liable  for  every  loss  sustained  by  reason 
of  his  negligence,  want  of  caution,  or  mistake,  as  well  "as  positive 
misconduct." 

In  Spering's  Appeal,  71  Penn.  St.  n,  JUDGE  SHARSWOOD  said  that 
directors  "are  not  liable  for  mistakes  of  judgment,  even  though 
they  may  be  so  gross  as  to  appear  to  us  absurd  and  ridiculous,  provided 
they  are  honest,  and  provided  they  are  fairly  within  the  scope  of  the 
powers  and  discretion  confided  to  the  managing  body."  As  I  under- 
stand this  language,  I  cannot  assent  to  it  as  properly  defining  to  any 
extent  the  nature  of  a  director's  responsibility.  Like  a  mandatary, 
to  whom  he  has  been  likened,  he  is  bound  not  only  to  exercise  proper 
care  and  diligence,  but  ordinary  skill  and  judgment.  As  he  is  bound 
to  exercise  ordinary  skill  and  judgment,  he  cannot  set  up  that  he  did 
not  possess  them.  When  damage  is  caused  by  his  want  of  judgment, 
he  cannot  excuse  himself  by  alleging  his  gross  ignorance.  One  who 
voluntarily  takes  the  position  of  director,  and  invites  confidence  in 
that  relation,  undertakes,  like  a  mandatary,  with  those  whom  he 
represents  or  for  whom  he  acts,  that  he  possesses  at  least  ordinary 
knowledge  and  skill,  and  that  he  will  bring  them  to  bear  in  the  dis- 
charge of  his  duties.  (Story  on  Bailments,  sec.  182.)  Such  is  the 
rule  applicable  to  public  officers,  to  professional  men  and  to  mechanics, 
and  such  is  the  rule  which  must  be  applicable  to  every  person  who 
undertakes  to  act  for  another  in  a  situation  or  employment  requiring 


MANAGEMENT  OF  THE  BUSINESS  UNIT  557 

skill  and  knowledge;  and  it  matters  not  that  the  service  is  to  be 
rendered  gratuitously.  These  defendants  voluntarily  took  the 
position  of  trustees  of  the  bank.  They  invited  depositors  to  confide 
to  them  their  savings,  and  to  intrust  the  safe  keeping  and  manage- 
ment of  them  to  their  skill  and  prudence.  They  undertook  not 
only  that  they  discharge  their  duties  with  proper  care,  but  that  they 
would  exercise  the  ordinary  skill  and  judgment  requisite  for  the 
discharge  of  their  delicate  trust. 

Enough  has  been  said  to  show  what  measure  of  diligence,  skill,  and 
prudence  the  law  exacts  from  managers  and  directors  of  corporations; 
and  we  are  now  prepared  to  examine  the  facts  of  this  case,  for  the  pur- 
pose of  seeing  if  these  trustees  fell  short  of  this  measure  in  the  mat- 
ters alleged  in  the  complaint.  This  bank  was  incorporated  by  the 
act,  chapter  467  of  the  Laws  of  1867,  and  it  commenced  business 
in  the  spring  of  that  year,  in  a  hired  building,  on  the  east  side  of 
Third  Avenue,  in  the  city  of  New  York.  It  remained  there  for  several 
years,  and  then  moved  to  the  west  side  of  the  avenue,  between  Forty- 
fifth  and  Forty-sixth  streets,  where  it  occupied  hired  rooms  until 
near  the  time  of  its  failure  in  the  fall  of  1875.  During  the  whole 
time  the  deposits  averaged  only  about  $70,000.  In  1867,  the  income 
of  the  bank  was  $942.12,  and  the  expenses,  including  amount  paid  for 
safe,  fixtures,  charter,  current  expenses,  and  interest  to  depositors,  were 
$5,571.34.  In  1868,  the  income  was  $5,719.43,  and  the  expenses 
including  interest  to  depositors,  $5,719.43.  In  1869,  the  income  was 
$3,918.27,  and  the  expenses  and  interest  paid  $5,346.05.  In  1870, 
the  income  was  $5,784.09  and  expenses  and  interest  $7,040.22.  In 
1871,  the  income  was  $13,551.14,  which  included  a  bonus  of  $4,000 
or  $6,000  obtained  upon  the  purchase  of  a  mortgage  of  $40,000, 
which  mortgage  was  again  sold  in  1874  at  a  discount  of  $2,000,  and 
the  expenses,  including  interest  paid,  were  $9,124.05.  In  1872  the 
income  was  $5,100.51,  and  the  expenses,  including  interest  paid, 
were  $7,212.49.  Down  to  the  first  day  of  January,  1873,  therefore 
the  total  expenses,  including  interest  paid,  were  $5,046  more  than 
the  income.  To  this  sum  should  be  added  $2,000  deducted  on  the 
sale  of  the  large  mortgage  in  1874,  which  was  purchased  at  the  large 
discount  in  1871,  as  above  mentioned,  and  yet  entered  in  the  assets 
at  its  face.  From  this  apparent  deficiency  should  be  deducted  the 
value  of  the  safe  and  furniture  of  the  bank,  from  which  the  receiver 
subsequently  realized  $500.  At  the  same  date,  the  amount  due  to 


558  LAW  AND  BUSINESS 

over  one  thousand  depositors  was  about  $70,000,  and  the  assets  of 
the  bank  consisted  of  about  $13,000  in  cash  and  the  balance  mostly 
of  mortgages  upon  real  estate. 

While  the  bank  was  in  this  condition,  with  a  lease  of  the  rooms 
then  occupied  by  it  expiring  May  i,  1874,  the  project  of  purchasing 
a  lot  and  erecting  a  banking-house  thereon  began  to  be  talked  of 
among  the  trustees.  The  only  reason  put  on  record  in  the  minutes 
of  the  meetings  held  by  the  trustees  for  procuring  a  new  banking- 
house  was  to  better  the  financial  condition  of  the  bank.  In  February, 
1873,  at  a  meeting  of  the  trustees,  a  committee  was  appointed  "on  a 
site  for  new  building";  and  in  March  the  committee  entered  into 
contract  for  the  purchase  of  a  plot  of  land,  consisting  of  four  lots 
on  the  corner  of  Forty-eighth  Street  and  Third  Avenue,  for  the  sum 
of  $74,500;  of  which  $1,000  was  to  be  paid  down,  $9,000  on  the  first 
day  of  May,  then  next,  and  $64,000  to  be  secured  by  a  mortgage, 
payable  on  or  before  May  i,  1875,  with  interest  from  May  i,  1873, 
at  7  per  cent;  and  there  was  an  agreement  that  payment  of  the 
principal  sum  secured  by  the  mortgage  might  be  extended  to  May  i, 
1877,  provided  a  building  should,  without  unavoidable  delay,  be 
erected  upon  the  corner  lot,  worth  not  less  than  $25,000.  This 
contract  was  reported  by  the  committee  to  the  trustees,  at  a  meeting 
held  April  7.  On  the  first  day  of  May,  1873,  the  real  estate  was 
conveyed  and  the  cash  payment  was  made,  and  four  separate  mort- 
gages were  executed  to  secure  the  balance,  one  upon  each  lot.  The 
mortgage  upon  the  lot  upon  which  the  bank  building  was  afterward 
erected  was  for  $30,500.  At  the  same  time  the  bank  became  obligated 
to  build  upon  that  lot  a  building  covering  its  whole  front,  twenty-five 
feet,  and  sixty  feet  deep,  and  not  less  than  five  stories  high,  and  have 
the  same  inclosed  by  the  first  day  of  November  then  next.  Upon 
that  lot  the  bank  proceeded,  in  the  spring  of  1875,  to  erect  a  building 
covering  the  whole  front,  and  seventy-six  feet  deep,  and  five  stories 
high,  at  an  expense  of  about  $27,000.  And  the  building  was  nearly 
completed  when  the  receiver  of  the  bank  was  appointed,  in  November 
of  that  year.  The  three  lots  not  needed  for  the  building  were  disposed 
of,  as  we  may  assume,  without  any  loss,  leaving  the  corner  lot  used 
for  the  building  to  cost  the  bank  $29,250;  and  we  may  assume  that 
that  was  then  the  fair  value  of  the  lot.  This  case  may  then  be  treated 
as  if  these  trustees  have  purchased  the  corner  lot  at  $29,250  and 
bound  themselves  to  erect  thereon  a  building  costing  $27,000.  When 
the  receiver  was  appointed,  that  lot  and  building  and  other  assets 


MANAGEMENT  OF  THE  BUSINESS  UNIT  559 

which  produced  less  than  $1,000,  constituted  the  whole  property  of 
the  bank  and  subsequently  the  lot  and  building  were  swept  away  by 
a  mortgage  foreclosure,  and  this  action  was  brought  to  recover  the 
damages  caused  to  the  bank  by  the  alleged  improper  investment  of  its 
funds,  as  above  stated,  in  the  lot  upon  which  the  building  was  erected. 
At  the  time  of  the  purchase  of  the  lot,  the  bank  was  substantially 
insolvent.  If  it  had  gone  into  liquidation,  its  assets  would  have 
fallen  several  thousand  dollars  short  of  discharging  its  liabilities, 
and  this  state  of  things  was  known  to  the  trustees.  It  had  been  in 
existence  about  six  years,  doing  a  losing  business.  The  amount  of 
its  deposits,  which  its  managers  had  not  been  able  to  increase,  shows 
that  the  enterprise  was  an  abortion  from  the  beginning,  either  because 
it  lacked  public  confidence,  or  was  not  needed  in  the  place  where  it 
was  located.  It  had  changed  its  location  once  without  any  benefit. 
It  had  on  hand  but  about  $13,000  in  cash,  of  which  $10,000  were  taken 
to  make  the  first  payments.  The  balance  of  its  assets  was  mostly 
in  mortgages  not-  readily  convertible.  One  was  a  mortgage  for 
$40,000,  which  had  been  purchased  at  a  large  discount,  and  we  may 
infer  that  it  was  not  very  salable,  as  the  trustees  resolved  to  sell  it 
as  early  as  May,  1873,  and  in  August,  1873,  authorized  it  to  be  sold 
at  a  discount  of  not  more  than  $2,500,  and  yet  it  was  not  sold  until 
1874.  In  this  condition  of  things  the  trustees  made  the  purchase 
complained  of  under  an  obligation  to  place  on  the  lot  an  expensive 
banking-house.  Whether  under  the  circumstances,  the  purchase 
was  such  as  the  trustees  in  the  exercise  of  ordinary  prudence,  skill, 
and  care,  could  make;  or  whether  the  act  of  purchase  was  reckless, 
rash,  extravagant,  showing  a  want  of  ordinary  prudence,  skill,  and  care, 
were  questions  for  the  jury.  It  is  not  disputed  that,  under  the  charter 
of  this  bank,  as  amended  in  1868  (chap.  294),  it  had  the  power  to 
purchase  a  lot  for  a  banking-house  "  requisite  for  the  transaction  of 
its  business."  That  was  a  power,  like  every  other  possessed  by  this 
bank,  to  be  exercised  with  prudence  and  care.  Situated  as  this 
moribund  institution  was,  was  it  a  prudent  and  reasonable  thing  to 
do,  to  invest  nearly  half  of  all  trust  funds  in  this  expensive  lot,  with 
an  obligation  to  take  most  of  the  balance  to  erect  thereon  an  extrav- 
agant building  ?  The  trustees  were  urged  on  by  no  real  necessity. 
They  had  hired  rooms  where  they  could  have  remained;  or  if  those 
rooms  were  not  adequate  for  their  small  business,  we  may  assume 
that  others  could  have  been  hired.  They  put  forward  the  claim  upon 
the  trial  that  the  rooms  they  then  occupied  were  not  safe.  That 


560  LAW  AND  BUSINESS 

may  have  been  a  good  reason  for  making  them  more  secure,  or  for 
getting  other  rooms,  but  not  for  the  extravagance  in  which  they 
indulged.  It  is  inferable,  however,  that  the  principal  motive  which 
influenced  the  trustees  to  make  this  change  of  location  was  to  improve 
the  financial  condition  of  the  bank  by  increasing  its  deposits.  Their 
project  was  to  buy  this  corner  lot  and  erect  thereon  an  imposing 
edifice,  to  inspire  confidence,  attract  attention,  and  thus  draw  deposits. 
It  was  intended  as  a  sort  of  advertisement  of  the  bank,  a  very  expen- 
sive one  indeed.  Savings  banks  are  not  organized  as  business  enter- 
prises. They  have  no  stockholders  and  are  not  to  engage  in 
speculations  or  money  making  in  a  business  sense.  They  are  simply 
to  take  the  deposits,  usually  small,  which  are  offered,  aggregate  them, 
and  keep  and  invest  them  safely,  paying  such  interest  to  the  depositors 
as  is  thus  made,  after  deducting  expenses,  and  paying  the  principal 
upon  demand.  It  is  not  legitimate  for  the  trustees  of  such  a  bank  to 
seek  deposits  at  the  expense  of  present  depositors.  It  is  their  business 
to  take  deposits  when  offered.  It  was  not  proper  for  these  trustees 
— or  at  least  the  jury  may  have  found  that  it  was  not — to  take  the 
money  then  on  deposit  and  invest  it  in  a  banking-house,  merely 
for  the  purpose  of  drawing  other  deposits.  In  making  this  investment, 
the  interests  of  the  depositors,  whose  money  was  taken,  can  scarcely 
be  said  to  have  been  consulted. 

It  matters  not  that  trustees  purchased  this  lot  for  no  more  than 
a  fair  value,  and  that  the  loss  was  occasioned  by  the  subsequent 
general  decline  in  the  value  of  real  estate.  They  had  no  right  to 
expose  their  bank  to  the  hazard  of  such  a  decline.  If  the  purchase 
was  an  improper  one  when  made,  it  matters  not  that  the  loss  came  from 
the  unavoidable  fall  in  the  value  of  the  real  estate  purchased.  The 
jury  may  have  found  that  it  was  grossly  careless  for  the  trustees  to 
lock  up  the  funds  in  their  charge  in  such  an  investment,  where  they 
could  not  be  reached  in  any  emergency  which  was  likely  to  arise  in 
the  affairs  of  the  crippled  bank. 

We  conclude,  therefore,  that  the  evidence  justified  the  finding  by 
the  jury  that  this  was  not  a  case  of  mere  error  or  mistake  of  judgment 
on  the  part  of  the  trustees,  but  that  it  was  a  case  of  improvidence, 
of  reckless,  unreasonable  extravagance,  in  which  the  trustees  failed 
in  that  measure  of  reasonable  prudence,  care,  and  skill  which  the 
law  requires. 

This  case  was  moved  for  trial  at  a  circuit  court,  and  before  the 
jury  was  impaneled,  the  defendants  claimed  that  the  case  was  improp- 


MANAGEMENT  OF  THE  BUSINESS  UNIT  561 

erly  in  the  circuit,  and  that  it  should  be  tried  at  special  term;  and 
the  court  ordered  that  the  trial  proceed,  and  at  the  close  of  the 
evidence,  the  defendants  moved  that  the  complaint  be  dismissed, 
on  the  ground  that  the  action  was  not  a  proper  one  to  be  tried  before 
a  jury,  and  should  be  tried  before  the  equity  branch  of  the  court. 
The  motion  was  denied,  and  these  rulings  are  now  alleged  for  error. 
The  receiver  in  this  case  represents  the  bank,  and  may  maintain  any 
action  the  bank  could  have  maintained.  The  trustees  may  be 
treated  as  agents  of  the  bank.  (In  re  German  Mining  Co.,  27  Eng. 
Law  &  Eq.  158;  Belknap  v.  Davis,  19  Me.  455;  Bedford  Railroad  Co. 
v.  Bowser,  48  Penn.  St.  29;  Butts  v.  Wood,  38  Barb.  181;  Austen  v. 
Daniels,  4  Den.  299;  0.  6°  M.  Railroad  Co.  v.  Me  Pherson,  35  Mo. 
13);  and  for  any  misfeasance  or  nonfeasance,  causing  damage  to 
the  bank,  they  were  responsible  to  it,  upon  the  same  principle  that 
any  agent  is  for  like  cause  responsible  to  his  principal.  It  has  never 
been  doubted  that  a  principal  may  sue  his  agent  in  an  action  at  law 
for  any  damages  caused  by  culpable  misfeasance  or  nonfeasance 
in  the  business  of  the  agency.  The  only  relief  claimed  in  this  com- 
plaint was  a  money  judgment,  and  we  think  it  was  properly  tried  as 
an  action  at  law.  No  equitable  rights  were  to  be  adjusted,  and  there 
was  no  occasion  to  appeal  to  an  equitable  forum. 

Treating  this,  therefore,  as  an  action  at  law,  it  follows  also  that 
the  objection  taken  that  other  trustees  should  have  been  joined  as 
the  defendants  cannot  prevail.  In  actions  ex  delicto,  the  plaintiff 
may  sue  one,  some,  or  all  of  the  wrongdoers.  (Liquidators  of  the 
Western  Bank  v.  Douglas,  22  Session  Cases  [2d  series,  475]  [Scotch]; 
Barbour  of  Parties,  203.) 

The  defendants  Hoffman  and  Gearty  filed  petitions  for  their 
discharge  in  bankruptcy  after  the  commencement  of  this  action,  and 
were  discharged  before  judgment  and  they  alleged  such  discharge  as  a 
defense  to  the  action.  The  trial  judge  at  the  General  Term  held  that 
the  discharge  furnished  no  defense,  and  we  are  of  the  same  opinion 
This  claim  was  purely  for  unliquidated  damages  occasioned  by  a  tort. 
Such  a  claim  was  not  provable  in  bankruptcy  and,  therefore,  was  not 
discharged.  (U.S.  Rev.  Stat.  [2d  ed.]  sees.  5115,  5119,  5067  to  5071; 
Zinn  v.  Ritterman,  2  Abb.  [N.S.]  261;  Kellogg  v.  Schuyler,  2  Den.  73; 
Crouch  v.  Gridley,  6  Hill,  250;  In  re  Wiggers,  2  Biss.  71;  In  re  C lough, 
2  Ben.  508;  In  re  Sidle,  2  Bank,  Reg.  77.) 

I  conclude,  therefore,  that  the  judgment  appealed  from  should 
be  affirmed. 


562  LAW  AND  BUSINESS 

The  appeal  of  the  plaintiff  from  the  order  of  the  general  term, 
granting  a  new  trial  as  to  defendant  Smith,  must  for  reasons  stated 
on  the  argument,  be  dismissed,  with  costs. 

QUESTIONS 

1 .  What  was  the  action  which  brought  in  the  principal  case  ?     Who  brought 
the  action?     What  was  the  wrong  alleged  to  have  been  committed? 
To  whom  will  the  damages  go  ? 

2.  What  degree  of  care  does  the  decision  in  this  case  exact  of  directors  in 
the  management  of  a  corporation  ? 

3.  What  is  likely  to  be  the  result  of  exacting  a  too  high  degree  of  care  of  the 
directors  of  a  corporation  ?     Of  exacting  a  too  low  degree  of  care  ? 

4.  Do  you  think  that  the  facts  of  this  case  warrant  the  finding  of  the  jury 
that  the  trustees  of  the  corporation  were  guilty  of  actionable  negligence  ? 

WAINWRIGHT  v.  P.  H.  AND  F.  M.  ROOTS  COMPANY 

176  Indiana  Reports  682  (1912) 

Action  by  William  W.  Wainwright  against  the  P.  H.  &  F.  M. 
Roots  Co.  From  a  judgment  for  defendant,  plaintiff  appeals. 
Transferred  from  Appellate  Court  under  section  1405,  Burns  1908, 
Acts  1901,  page  590.  Reversed. 

Cox,  J.  Appellee  is  a  private  manufacturing  corporation  organ- 
ized under  the  laws  of  this  state,  and  carrying  on  its  business  in  the 
city  of  Connersville.  Appellant  was  formerly  the  superintendent  of 
its  factory,  under  the  supervision  of  its  president;  and  while  acting 
in  this  capacity,  under  a  written  contract  of  employment  for  a  term 
of  years  which  had  not  yet  expired,  and  as  a  director  of  the  corpora- 
tion, he  entered  into  another  written  contract,  which  canceled  the 
existing  contract,  and  in  which  it  was  agreed,  in  substance,  that 
appellee  would  separate  from  its  factory  a  particular  and  considerable 
part  of  its  manufacturing  business,  and  instal  it  in  a  special  foundry 
and  machine-shop,  to  be  properly  constructed  and  equipped  by 
appellee  with  the  necessary  machinery  and  appliances;  that  therein 
certain-named  articles  were  to  be  manufactured  at  a  fixed  schedule 
of  prices;  that,  in  addition  to  providing  the  building  and  machinery, 
appellee  was  to  furnish  all  necessary  capital  to  pay  for  labor  and 
materials  for  manufacturing  the  articles  to  be  turned  out  by  the 
special  factory;  that  appellant  was  to  have  entire  control  over  the 
special  factory,  and  was  to  provide  all  labor  and  materials  necessary 
promptly  and  efficiently  to  perform  the  work  contemplated,  and  was 


MANAGEMENT  OF  THE  BUSINESS  UNIT  563 

to  turn  such  work  out  complete  and  first  class  in  respect  to  workman- 
ship, design,  and  material  at  the  prices  fixed  in  the  contract,  or  lower 
if  possible;  that  the  work  was  to  be  done  under  the  cost  system,  and 
that  if  appellant  succeeded  in  producing  the  work  at  less  than  the 
prices  fixed  in  the  schedule,  the  difference  between  the  prices  so 
fixecf  and  the  actual  cost  was  to  be  divided  equally  between  appellant 
and  appellee;  that  in  addition  to  such  percentage  of  possible  addi- 
tional profits,  appellant  was  to  be  compensated  by  a  yearly  salary 
of  $1,800,  and  half  the  profit  on  repairs  of  articles  manufactured  and 
returned  for  repairs;  that  appellant  was  not  to  incur  any  liability 
in  case  of  his  inability  to  produce  the  various  articles  to  be  manu- 
factured at  the  prices  named;  and  that  the  relation  created  by  the 
contract  should  continue  for  five  years. 

The  contract  was  entered  into  and  executed  by  appellant  and  the 
president  and  general  manager  of  appellee  company.  The  per- 
formance of  its  provisions  was  never-  entered  upon,  and  appellant 
sued  for  damages  for  its  breach,  alleging  appellee  refused  to  perform 
its  part  of  the  conditions  and  that  he  was  ready  at  all  times  to  perform 
those  imposed  upon  him. 

The  fourth  paragraph  of  answer  alleged  that  at  the  time  of  the 
execution  of  the  contract  sued  on,  and  thereafter,  appellant  was  duly 
elected,  qualified,  and  acting  director  of  appellee  company,  and  that 
the  contract  was  therefore  illegal  and  void. 

That  the  contract  was  illegal  and  void  is  the  pleaders'  conclusion 
from  the  bare  fact  of  appellant's  relationship  to  the  appellee,  as  one 
of  its  directors,  at  the  time  the  contract  was  made,  and  the  question 
for  decision  is,  therefore,  whether  as  a  matter  of  law  it  must  be  so 
held  to  be.  The  cases  of  Port  v.  Russell  (1871),  36  Ind.  60,  10  Am. 
Rep.  5,  and  Wayne  Pike  Co.  v.  Hammons  (1891),  129  Ind.  368,  are 
relied  on  by  counsel  for  appellee  as  sustaining  the  action  of  the 
trial  court  in  overruling  the  demurrer  to  this  answer  and  the  proposi- 
tion that  contracts  between  directors  and  their  corporations  are 
unqualifiedly  void.  It  is  true  that  language  is  used  in  the  opinion 
of  the  court  in  the  case  first  mentioned  which  would  seem  to  indicate 
that  the  judge  who  wrote  it  firmly  believed  that  the  rule  should  be 
that  all  such  contracts  should  be  considered  void  and  unenforceable. 
But  this  language  was  used  in  passing  upon  the  sufficiency  of  a  com- 
plaint for  equitable  relief  against  contracts  between  directors  and  the 
corporation  which  the  allegations  of  the  complaint  showed  were 
procured  through  a  conspiracy  among  the  directors  and  were  saturated 


564  LAW  AND  BUSINESS 

with  frauds  against  the  company  and  for  the  benefit  of  the  directors 
in  the  manner  in  which  they  were  executed.  The  allegations  of 
fraud,  together  with  the  fiduciary  relation  of  the  directors  to  the  cor- 
poration, manifestly  made  a  case  for  equitable  relief  against  the 
contracts.  So  far  as  that  case  may  be  said  to  assert  the  broad  rule 
to  be  that  all  contracts  between  directors  and  their  corporate  bod^  are 
void,  it  must  be  considered  dictum  without  appreciable  support 
anywhere. 

Where  the  opinion  in  the  case  of  Wayne  Pike  Co.  v.  Hammons, 
supra,  touches  the  question  in  this  case  at  all  we  find  the  following: 
"The  officers  of  a  corporation  are  its  agents,  and  they  are  governed 
by  the  rules  of  law  applicable  to  other  agents,  as  between  themselves 
and  their  principal,  in  so  far  as  such  rules  relate  to  honesty  and  fair 
dealing  in  the  management  of  the  affairs  of  their  principal.  They 
can  no  more  use  the  business  of  their  principal  for  their  own  private 
gain  than  any  other  agent,  and  should  they  do  so  they  should  be  held 
to  the  same  strict  rule  of  accountability  as  the  agent  of  a  private 
person."  The  court  then  applied  this  statement  of  the  duty  of 
corporate  officers  to  test  the  sufficiency  of  a  complaint  for  equitable 
relief  which  charged  conspiracy  and  fraud  on  the  part  of  directors  of  a 
corporation  in  dealing  with  corporate  concerns  to  their  personal 
advantage. 

There  are  in  the  books  almost  innumerable  and  seemingly  con- 
flicting and  irreconcilable  judicial  expressions  on  this  question,  many 
of  which  are  dicta.  These  judicial  pronouncements  run  from  the 
broad  and  unqualified  propositions  that  in  no  case  can  a  director  be 
allowed  to  take  or  make  a  contract  with  his  company  and  that  such 
contracts  when  made  are  void,  to  the  other  extreme  that  such  con- 
tracts are  valid.  Between  these  two  boundaries  of  the  case  law  on 
the  subject  is  found  what  is  perhaps  the  more  practicable  view,  that 
such  contracts  are  merely  voidable  at  the  option  of  the  corporation. 
Mingled  with  these  three  general  rules  there  are  numerous  cases  that 
seemingly  involve  various  departures  from  a  modification  of  all  of 
them.  A  general  review  of  what  seems  to  be  a  condition  of  fog  and 
confusion  in  the  many  cases  dealing  with  the  question  would  be 
unprofitable  and  impracticable  in  this  opinion.  See,  however, 
10  Cyc.  794,  807;  21  American  and  English  Encyclopedia  of  Law 
(26.  ed.),  899,  et  seq.;  2  Cook  Corporations  (6th  ed.),  section  649; 
2  Thompson,  Corporations  (2d  ed.),  section  1224,  et  seq.;  i  Morawetz, 
Private  Corporations  (2d  ed.),  section  516,  et  seq.;  2  Purdy's  Beach, 


MANAGEMENT  OF  THE  BUSINESS  UNIT  565 

Private  Corporations,  sections  739,  742;  2  Pomeroy,  Eq.  Jurisp. 
(3d  ed.)  section  956,  et  seq.;  3  Pomeroy,  Eq.  Jurisp.  (36.  ed.),  section 
1077;  i  Page,  Contracts,  section  181. 

From  the  mass  of  legal  discussion  of  the  various  phases  of  the 
question  this  appears:  That  the  validity  of  such  a  contract,  and 
whether  it  is  even  voidable,  often  depends  very  much  upon  its  nature 
and  terms,  the  circumstances  under  which  it  was  made,  and  who 
acted  for  the  corporation  in  the  making.  Contracts  for  the  loan  of 
money  by  a  director  to  his  company,  and  contracts  for  personal 
services  to  it  which  are  outside  the  scope  of  his  duties  as  an  officer  are 
generally  upheld  as  valid,  when  such  contracts  are  open  and  otherwise 
free  from  blame.  10  Cyc.  812 ;  21  American  and  English  Encyclopedia 
Law  (2d  ed.),  905;  i  Page,  Contracts,  section  181;  2  Thompson, 
Corporations  (26.  ed.),  section  1224,  et  seq.;  Levering  v.  Bimel  (1897), 
146  Ind.  545;  Nappanee  Canning  Co.  v.  Ried,  Murdoch  6s  Co.  (1903), 
159  Ind.  614,  59  L.R.A.  199;  Kenner  v.  Whitelock  (1899),  152  Ind.  635; 
Twin-Lick  Oil  Co.  v.  Marbury  (1875),  91  U.S.  587,  23  L.  Ed.  328; 
Savage  v.  Madelia  Farmers'  Warehouse  Co.  (1906),  98  Minn.  343,  108 
N.W.  296;  Henry  v.  Michigan,  etc.,  Assn.  (1907),  147  Mich.  142, 
no  N.W.  523;  Garrison  Canning  Co.  v.  Stanley  (1907),  133  Iowa 
57,  no  N.W.  171;  Mitchell  v.  United,  etc.,  Paper  Co.  (1907),  72  N.J. 
Eq.  580,  66  Atl.  938;  Bagley  v.  Carthage,  etc.,  Railway  Co.  (1900),  165 
N.Y.  179,  58  N.E.  895;  Babcock  v.  Farwell  (1909),  146  111.  App.  307; 
note  to  Beach  v.  Miller  (1889),  17  Am.  St.  291,  298. 

The  law  was  correctly  stated  in  Wayne  Pike  Co.  v.  Hammons, 
supra,  that  directors  of  corporations  are  its  agents,  and  in  this  rela- 
tionship are  governed  by  the  same  rules  of  law  and  are  held  to  the 
same  strict  rule  of  accountability,  honesty,  and  fair  dealing  between 
themselves  and  their  principal  in  dealing  with  the  subject-matter 
of  their  agency  as  other  agents.  If  the  agent  act  for  himself  and  his 
principal  at  the  same  time  in  a  matter  connected  with  the  relation 
between  them,  his  conduct  is  constructively  fraudulent,  and  if  a 
contract  be  the  result  it  is  voidable  at  the  election  of  the  principal. 
It  is  presumed,  where  he  is  thus  potentially  on  both  sides  of  the  con- 
tract, that  self-interest  will  overcome  his  fidelity  to  his  principal  to 
his  own  benefit  and  his  principal's  hurt  But  he  may  deal  directly 
with  his  principal,  and  if  they  are  on  equal  terms,  and  the  principal 
has  full  knowledge  of  the  matter,  the  contract  will  be  valid,  and  he 
may  so  deal  with  the  principal  through  other  agents  who  have  author- 
ity adequately  to  represent  the  principal's  side  of  the  contract.  So 


566  LAW  AND  BUSINESS 

the  general  rule  seems  to  be  that  where  the  contract  between  a  cor- 
poration and  one  of  its  directors  is  made  on  the  part  of  the  company 
by  a  majority  of  the  directors  acting  for  its  interests  honestly  and  in 
good  faith,  and  with  full  knowledge  of  the  matter,  or  by  another 
independent  agent  with  authority  to  act  for  it,  such  contract  is  not 
even  voidable,  except  for  unfairness  or  fraud,  for  the  presence  of 
which  courts  will  closely  scrutinize  the  contract.  2  American  and 
English  Encyclopedia  of  Law  and  Pr.  1059,  1068;  i  Morawetz,  Private 
Corporations  (2d  ed.),  section  527;  2  Purdy's  Beach,  Private  Cor- 
porations, section  739;  2  Thompson,  Corporations  (26.  ed.),  section 
1224,  et  seq.;  2  Cook,  Corporations  (6th  ed.),  section  649;  2  Pomeroy, 
Eq.  Jurisp.  (3d  ed.),  section  957;  3  Pomeroy,  Eq.  Jurisp.  (3d  ed.), 
section  1077,  and  notes;  Clark,  Corporations  (2d  ed.),  page  498; 
note  to  Beach  v.  Miller,  supra,  pages  300,  307. 

In  this  case  we  have  a  complaint  involving  a  contract,  so  far  as 
appellant  is  concerned,  to  render  services  to  his  company  in  the 
matter  of  management  and  superintendence  of  a  part  of  its  general 
manufacturing  business,  which  was  wholly  outside  his  directorial 
duties.  He  had  been  performing  similar  duties,  the  allegations 
of  the  complaint  show,  under  different  terms  as  to  compensation,  for 
years.  The  contract  was  prepared  by  the  company  and  urged  upon 
appellant,  and  was  executed  by  appellee's  president  and  general 
manager,  an  independent  agent.  It  is  apparent  that  the  company 
had  full  knowledge  of  the  transaction,  and  if  the  president  and  general 
manager  were  clothed  with  authority  to  make  the  contract  for  the 
corporation,  it  is  not  only  not  void,  but  not  necessarily  voidable.  The 
demurrer  should  have  been  sustained  to  the  fourth  paragraph  of 
answer. 

The  judgment  is  reversed,  with  instructions  to  the  lower  court  to 
grant  appellant  a  new  trial,  to  sustain  the  demurrer  to  the  fourth 
paragraph  of  answer,  and  for  further  proceedings  in  harmony  with 
this  opinion. 

QUESTIONS 

i.  D,  a  director  of  the  X  Company,  owned  a  patent  which  he  offered  to  sell 
to  the  corporation.  The  directors  considered  and  accepted  the  offer. 
v  (a)  D  was  not  present  at  the  meeting  of  the  directors.  (6)  D  was  pres- 
ent but  took  no  part  in  the  discussion  and  did  not  vote  for  the 
acceptance  of  the  offer,  (c)  D  was  present,  took  part  in  the  discus- 
sion, and  voted  for  the  acceptance  of  the  offer  but  his  vote  was  not 
necessary  to  bind  the  corporation  to  the  action,  (e)  D's  vote  was 


MANAGEMENT  OF  THE  BUSINESS  UNIT  567 

necessary  to  bind  the  corporation.     What  are  the  rights  of  the  corpora- 
tion, if  any,  against  D  under  each  hypothesis  ? 

2.  D,  a  director  of  the  Y  Company,  bought  a  negotiable  obligation  of  the 
corporation  at  a  discount  and  sought  to  enforce  it  against  the  corporation 
for  its  face  value.     What  decision  ? 

3.  The  Y  Company  had  a  valuable  lease  which  it  intended  to  renew  at  the 
expiration  of  the  lease.     D,  a  director  of  the  corporation,  took  the  lease 
in  his  own  name  and  offered  to  assign  it  to  the  corporation  at  an  advanced 
rental.     What  are  the  rights  of  the  corporation,  if  any,  with  respect  to 
the  lease  ? 

4.  D,  a  director  of  the  Z  Company,  entered  into  a  business  in  competition 
with  the  Z  Company  from  which  he  made  large  profits.     What  are  the 
rights  of  the  corporation,  if  any,  against  D  ? 

MITCHELL  v.  REED 
61  New  York  Reports  123  (1874) 

Appeal  from  judgment  of  the  General  Term  of  the  Supreme 
Court  in  the  first  judicial  department  affirming  a  judgment  in  favor 
of  defendant,  entered  upon  decision  of  the  court  at  Special  Term. 

This  action  was  brought  to  have  certain  leases,  obtained  by  the 
defendant  during  the  existence  of  a  copartnership  between  him  and 
plaintiff,  for  terms  to  commence  at  its  termination,  of  premises  leased 
and  occupied  by  the  firm,  declared  to  have  been  taken  for  the  partner- 
ship, and  to  have  it  adjudged  that  the  defendant  held  them  as  trustee 
for  the  partnership.  The  facts  found  were  substantially  as  follows: 

The  plaintiffs  were  copartners,  conducting  and  carrying  on  the 
Hoffman  House  in  the  city  of  New  York.  The  copartnership,  by  its 
terms,  expired  May  i,  1871 ;  it  .owned  various  leases  of  premises  which 
were  used  for  the  partnership  business;  all  of  the  leases  expired  at  the 
same  time  with  the  copartnership.  The  firm  had  spent  large  sums  of 
money  in  making  valuable  improvements  and  in  fitting  up  the  lease- 
hold premises  so  that  they  could  be  beneficially  used  in  connection, 
and  also  in  fixtures  and  furnishing,  and  by  their  joint  efforts  had 
built  up  a  profitable  business,  and  largely  enhanced  the  rental  value 
of  the  premises.  In  1869  the  defendant,  without  any  notice  of  his 
intent  to  apply  therefor,  and  without  the  knowledge  of  plaintiff, 
procured  renewal  leases,  in  his  own  name,  of  the  premises  for  terms 
commencing  at  the  termination  of  the  partnership  leases  and  of  the 
partnership,  which,  upon  discovery  thereof  having  been  made  by 
plaintiff,  defendant  claimed  were  his  property  exclusively,  and  refused 


568  LAW  AND  BUSINESS 

to  recognize  or  acknowledge  that  the  partnership  or  plaintiff  had 
any  right  or  interest  therein.  Other  facts  appear  in  the  opinion. 

The  court  found,  as  conclusions  of  law,  that  the  defendant  Reed 
was  the  sole  owner  of  the  leases  executed  to  him  as  aforesaid,  and 
that  the  plaintiff  had  no  right,  title,  nor  interest  in  or  to  them,  or 
either  of  them,  and  that  the  defendant  have  judgment  accordingly, 
to  which  plaintiff  duly  excepted.  Judgment  was  rendered  accord- 
ingly. 

The  plaintiff  commenced  this  action  soon  after  he  ascertained 
that  the  defendant  had  taken  the  new  leases,  to-wit:  in  March,  1870, 
and  the  cause  was  brought  to  trial  in  February,  1871. 

EARL,  C.  The  relation  of  partners  with  each  other  is  one  of 
trust  and  confidence.  Each  is  the  general  agent  of  the  firm,  and  is 
bound  to  act  in  entire  good  faith  to  the  other.  The  functions,  rights, 
and  duties  of  partners  in  a  great  measure  comprehend  those  both  of 
trustees  and  agents,  and  the  general  rules  of  law  applicable  to  such 
characters  are  applicable  to  them.  Neither  partner  can,  in  the 
business  and  affairs  of  the  firm,  clandestinely  stipulate  for  a  private 
advantage  to  himself;  he  can  neither  sell  to  nor  buy  from  the  firm  at 
a  concealed  profit  to  himself.  Every  advantage  which  he  can  obtain 
in  the  business  of  the  firm  must  enure  to  the  benefit  of  the  firm.  These 
principles  are  elementary,  and  are  not  contested.  (Story,  sec.  174; 
Collyer,  181 , 182.)  It  has  been  frequently  held  that  when  one  partner 
obtains  the  renewal  of  a  partnership  lease  secretly,  in  his  own  name,  he 
will  be  held  a  trustee  for  the  firm  as  to  the  renewed  lease.  It  is  con- 
ceded that  this  is  the  rule  where  the  partnership  is  for  a  limited 
term,  and  either  partner  takes  a  lease  commencing  within  the  term; 
but  the  contention  is  that  the  rule  does  not  apply  where  the  lease 
thus  taken  is  for  a  term  to  commence  after  the  expiration  of  the 
partnership  by  its  own  limitation,  and  whether  this  contention  is 
well  founded,  is  one  of  the  grave  questions  to  be  determined  upon 
this  appeal. 

It  is  not  necessary,  in  maintaining  the  right  of  the  plaintiff  in 
this  case,  to  hold  that  in  all  cases  a  lease  thus  taken  shall  enure  to  the 
benefit  of  the  firm,  but  whether,  upon  the  facts  of  this  case,  these 
leases  ought  to  enure  to  the  benefit  of  this  firm.  I  will  briefly  allude 
to  some  of  the  prominent  features  of  this  case.  These  parties  had 
been  partners  for  some  years;  they  were  equal  in  dignity,  although 
their  interests  differed.  The  plaintiff  was  not  a  mere  subordinate  in 
the  firm,  but  so  far  as  appears,  just  as  important  and  efficient  in  its 


MANAGEMENT  OF  THE  BUSINESS  UNIT  569 

affairs  as  the  defendant.  They  procured  the  exclusive  control  of  the 
leases  of  the  property,  to  terminate  May  i,  1871,  and  their  partner- 
ship was  to  terminate  on  the  same  day.  They  expended  many 
thousand  dollars  in  fitting  up  the  premises,  a  portion  thereof  after  the 
new  leases  were  obtained,  and  they  expended  a  very  large  sum  in 
furnishing  them.  By  their  joint  skill  and  influence  they  built  up 
a  very  large  and  profitable  business,  which  largely  enhanced  the 
rental  value  of  the  premises.  More  than  two  years  before  the 
expiration  of  their  leases  and  of  their  partnership,  the  defendant 
secretly  procured,  at  an  increased  rent,  in  his  own  name,  the  new 
leases  which  are  of  great  value.  Although  the  plaintiff  was  in  daily 
intercourse  with  the  defendant,  he  knew  nothing  of  these  leases  for 
about  a  year  after  they  had  been  obtained.  There  is  no  proof  that 
the  lessors  would  not  have  leased  to  the  firm  as  readily  as  to  the 
defendant  alone.  The  permanent  fixtures,  by  the  terms  of  the  leases 
at  their  expiration,  belonged  to  the  lessors.  But  the  movable  fixtures 
and  furniture  were  worth  vastly  more  to  be  kept  and  used  in  the 
hotel  than  to  be  removed  elsewhere.  Upon  these  facts  I  can  enter- 
tain no  doubt,  both  upon  principle  and  authority,  that  these  leases 
should  be  held  to  enure  to  the  benefit  of  the  firm.  If  the  defendant 
can  hold  these  leases,  he  could  have  held  them  if  he  had  secretly 
obtained  them  immediately  after  the  partnership  commenced,  and 
had  concealed  the  fact  from  the  plaintiff  during  the  whole  term. 
There  would  thus  have  been,  during  the  whole  term,  in  making 
permanent  improvements  and  in  furnishing  the  hotel,  a  conflict 
between  his  duty  to  the  firm,  and  his  self-interest.  Large  invest- 
ments and  extensive  furnishing  would  add  to  the  value  of  his  lease,  and 
defendant  would  be  under  constant  temptation  to  make  them. 
While  he  might  not  yield  to  the  temptation,  and  while  proof  might 
show  that  he  had  not  yielded,  the  law  will  not  allow  a  trustee  thus 
situated  to  be  thus  tempted,  and  therefore  disables  him  from  making 
a  contract  for  his  own  benefit.  (Terwilliger  v.  Brown,  44  N.Y.  237, 
and  cases  cited.)  It  matters  not  that  the  court  at  Special  Term 
found  upon  the  evidence  that  the  improvements  were  judicious  and 
prudent  for  the  purposes  of  the  old  term.  The  plaintiff  was  entitled 
to  the  unbiased  judgment  of  the  defendant  as  to  such  improvements, 
uninfluenced  by  his  private  and  separate  interest.  But,  further, 
the  parties  owned  together  a  large  amount  of  hotel  property  in  the 
form  of  furniture  and  supplies,  considerably  exceeding,  as  I  infer, 
$100,000  in  value.  Assuming  that  the  partnership  was  not  to  be 


57°  LAW  AND  BUSINESS 

continued  after  the  first  day  of  May,  1871,  this  property  was  to  be 
sold,  or  in  some  way  disposed  of  for  the  benefit  of  the  firm,  and  each 
partner  owed  a  duty  to  the  firm  to  dispose  of  it  to  the  best  advantage. 
Neither  could,  without  the  violation  of  his  duty  to  the  firm,  place 
the  property  in  such  a  situation  that  it  would  be  sacrificed,  or  that  he 
could  purchase  it  for  his  separate  benefit,  at  a  great  profit.  Much  of 
this  property,  such  as  mirrors,  carpets,  etc.,  was  fitted  for  use  in  this 
hotel,  and  it  is  quite  manifest  that  all  of  it  would  sell  better  with  a 
lease  of  the  hotel,  than  it  would  if  removed  therefrom.  It  is 
clear  that  one  or  both  of  these  parties  could  obtain  advantageous 
leases  of  the  hotel  for  a  term  of  years,  and  hence,  if  the  parties  had 
determined  to  dissolve  their  partnership,  it  would  have  been  a  measure 
of  ordinary  prudence  to  have  obtained  the  leases  and  transferred  the 
property  with  the  leases  as  the  only  mode  of  realizing  its  value.  This 
was  defeated  by  the  act  of  the  defendant,'  if  he  is  allowed  to  hold 
these  leases,  and  thus  place  himself  in  a  position  where  the  property 
must  be  largely  sacrificed  or  purchased  by  himself  at  a  great  advan- 
tage. This  the  law  will  not  tolerate.  The  language  of  LORD  ELDON, 
in  Feather stonhaugh  v.  Fenwick  (17  Ves.  311),  a  case  in  many  respects 
resembling  this,  is  quite  in  point.  He  says:  "If  they  [the  defendants] 
can  hold  this  lease  and  the  partnership  stock  is  not  brought  to  sale, 
they  are  by  no  means  on  equal  terms.  The  stock  cannot  be  of 
equal  value  to  the  plaintiff,  who  was  to  carry  it  away  and  seek  some 
place  in  which  to  put  it,  as  to  the  defendants  who  were  to  continue  it 
in  the  place  where  the  trade  was  already  established,  and  if  the 
stock  was  sold  the  same  construction  would  give  them  an  advantage 
over  the  bidders.  In  effect  they  would  have  secured  the  good-will  of 
the  trade  to  themselves  in  exclusion  of  their  partner."  For  these 
reasons,  independently  of  the  consideration  that  the  leases  themselves 
had  a  value  to  which  the  firm  was  entitled  upon  other  grounds  and 
upon  authorities  to  be  hereafter  cited,  the  plaintiff,  who  commenced 
his  suit  about  one  year  before  the  term  of  the  partnership  expired, 
was,  upon  undisputed  principles  and  authorities  applicable  to  all 
trustees  and  persons  holding  a  fiduciary  relation  to  others,  entitled 
to  the  relief  he  prayed  for. 

It  has  long  been  settled  by  adjudications,  that  generally  when 
one  partner  obtains  the  renewal  of  a  partnership  lease  secretly,  in  his 
own  name,  he  will  be  held  a  trustee  for  the  firm,  in  the  renewed  lease, 
and  when  the  rule  is  otherwise  applicable,  it  matters  not  that  the 


MANAGEMENT  OF  THE  BUSINESS  UNIT  571 

new  lease  is  upon  different  terms  from  the  old  one,  or  for  a  larger  rent, 
or  that  the  lessor  would  not  have  leased  to  the  firm.  The  law  recog- 
nizes the  renewal  of  a  lease  as  a  reasonable  expectancy  of  the  tenants 
in  possession,  and  in  many  cases  protects  this  expectancy  as  a  thing 
of  value.  I  will  briefly  notice  a  few  of  the  cases  upon  this  subject. 
In  Holdridge  v.  Gillespie  (2  J.  Ch.,  30),  CHANCELLOR  KENT  says: 
"It  is  a  general  principle  pervading  the  cases,  that  if  a  mortgagee, 
executor,  trustee,  tenant  for  life,  etc.,  who  has  a  limited  interest,  gets 
an  advantage  by  being  in  possession,  or  '  behind  the  back '  of  the  party 
interested  in  the  subject,  or  by  some  contrivance  or  fraud,  he  shall 
not  retain  the  same  for  his  own  benefit,  but  hold  it  in  trust."  That 
was  a  case  where  a  lease  was  assigned  as  security,  and  the  assignee 
surrendered  it  to  the  lessor  and  took  a  new  lease  for  an  extended  term 
of  years.  In  Phyfe  v.  Wardell,  5  Paige,  268,  CHANCELLOR  WAL WORTH 
lays  down  the  general  rule,  "that  if  a  person  who  has  a  particular  or 
special  interest  in  a  lease,  obtains  a  renewal  thereof  from  the  cir- 
cumstance of  his  being  in  possession  as  tenant  or  from  having  such 
particular  interest,  the  renewed  lease  is  in  equity  considered  as  a 
mere  continuance  of  the  original  lease,  subject  to  the  additional 
charges  upon  the  renewal,  for  the  purpose  of  protecting  the  equitable 
rights  of  all  parties  who  had  any  interest,  either  legal  or  equitable, 
in  the  old  lease."  That  case  was  followed  in  Gibbes  v.  Jenkins  (3  Sand. 
Ch.,  131),  where  it  was  held  that  one  purchasing  a  leasehold  which 
was  subject  to  a  mortgage  and  contained  no  covenant  of  renewal, 
could  not  escape  the  lien  of  the  mortgage  by  suffering  the  lease  to 
expire  and  afterward  obtaining  a  new  lease  of  the  premises;  that  the 
new  lease  in  such  case,  though  not  a  renewal,  was  a  continuance  of 
the  original  lease  for  the  purpose  of  protecting  the  rights  of  the  parties 
interested  in  the  original  lease,  both  legal  and  equitable.  In  these 
two  cases  church  leases  were  involved,  and  some  stress  was  laid 
upon  that  fact,  as  the  continuance  of  such  leases  was  expected  as  a 
matter  of  course,  without  any  covenant  of  renewal.  But  the  fact 
that  they  were  church  leases  could  make  no  real  difference  in  the 
principle  upon  which  the  decisions  were  based.  The  fact  that  a 
renewal  or  continuance  of  a  lease  is  more  or  less  certain,  can  make  no 
difference  with  the  principle;  that  springs  from  the  fact  that  the 
party  obtained  the  new  lease  from  the  position  he  occupied,  being  in 
possession  and  having  the  good  will  which  accompanies  that,  or 
being  connected  with  the  old  lease  in  some  way,  and  thus  enabled  to 


572  LAW  AND  BUSINESS 

take  an  inequitable  advantage  of  other  parties  also  interested,  to 
whom  he  owed  some  duty. 

In  Struthers  v.  Pearce  (51  N.Y.  357),  it  was  held  that  when,  during 
the  existence  of  a  continuing  copartnership  of  undetermined  duration, 
three  of  four  copartners,  without  the  knowledge  of  the  other,  obtained 
a  new  lease  in  their  own  names,  of  premises  leased  and  used  by  the 
firm,  the  same  became  partnership  property,  and  upon  dissolution 
the  other  partner  was  entitled  to  his  proportion  of  the  value.  In 
that  case  the  defendants  intended  to  dissolve  the  copartnership  as 
early  as  August,  and  gave  written  notice  on  the  eighteenth  day  of 
September,  1865,  for  the  dissolution  on  the  thirty-first  day  of  Decem- 
ber, following.  On  the  eleventh  day  of  September,  the  defendants 
secretly  obtained  a  new  lease,  in  their  own  names,  of  the  same  premises, 
for  a  term  of  five  years,  to  commence  May  i,  1866.  I  think  that  case 
is  fairly  decisive  of  this.  It  is  true  that  a  period  for  a  dissolution  of 
the  partnership  had  not  been  fixed  when  the  new  lease  was  taken, 
but  negotiations  were  pending  for  its  dissolution,  and  a  few  days 
after  the  new  lease  was  taken,  a  time  for  its  dissolution  was  fixed  by 
a  written  notice.  But  it  can  make  no  difference  that  the  partnership 
might  have  been  continued  by  the  parties  until  after  the  new  term 
commenced.  So  it  might  here,  if  the  parties  had  so  willed.  There 
they  had  the  right  to  dissolve  it  at  any  time.  The  principle  which 
lies  at  the  foundation  of  the  decision  of  that  and  all  similar  cases  must 
be  the  one  above  stated,  that  the  defendants  in  possession  took  advan- 
tage of  their  position  to  procure  the  new  lease,  and  thus  deprived  the 
plaintiff  of  a  benefit  to  which  he,  with  them,  was  equally  entitled. 
In  a  note  to  Moody  v.  Matthews  (17  Ves.,  185,  Sumner's  ed.)  the 
learned  editor  says,  as  a  deduction  from  adjudged  cases,  that  "with 
a  possible  exception  in  favor  of  a  bona  fide  purchaser,  it  seems  to  be 
a  universal  rule  that  no  one  who  is  in  possession  of  a  lease  or  a  par- 
ticular interest  in  a  lease  which  lease  is  affected  with  any  sort  of 
equity  in  behalf  of  third  persons,  can  renew  the  same  for  his  own  use 
only;  but  such  renewal  must  be  construed  as  a  graft  upon  the  old 
stock."  In  Clements  v.  Hall  (2  De  G.  &  J.,  173),  where  one  partner 
in  a  mining  partnership  died  in  1847,  and  the  surviving  partner 
thereafter  worked  the  mine  without  a  new  lease  thereof,  claiming  to 
do  so  for  his  own  benefit,  until  1850,  when  the  lessor  gave  him  notice 
to  quit  in  March,  1851,  when  he  entered  into  new  negotiations  with 
the  lessor  for  a  new  lease,  and  obtained  one  of  the  greater  part  of  the 


MANAGEMENT  OF  THE  BUSINESS  UNIT  573 

mine,  on  terms  much  more  burdensome  than  those  of  the  old  tenancy, 
it  was  held  that  those  who  claimed  under  the  will  of  the  deceased 
partner  were  entitled  to  a  share  of  the  benefit  in  the  new  lease.  In 
Clegg  v.  Fishwick  (i  McN.  &  G.  294)  one  of  several  partners  working  a 
mine  under  a  lease  died,  and  the  firm  business  was  thereafter  carried 
on  for  several  years  between  the  surviving  partners  and  the  plaintiff, 
widow  of  the  deceased  partner.  Finally,  the  old  lease  expired,  and 
some  of  the  partners  took  a  new  lease  of  the  mine  without  the  privity 
of  the  plaintiff.  It  was  held  that  the  estate  of  the  deceased  partner 
was  interested  in  the  new  lease.  The  LORD  CHANCELLOR  says:  "The 
old  lease  was  the  foundation  of  the  new  lease,  the  tenant's  right  of 
renewal  arising  out  of  the  old  lease  giving  the  partners  the  benefit  of 
this  new  lease;  at  least  the  law  assumes  it  to  be  so.  Without  saying 
at  all  what  circumstances  there  may  be  to  interfere  with  that  ordinary 
right,  we  know  that  the  rule  of  equity  is  that  parties  interested  jointly 
with  others  in  a  lease,  cannot  take  to  themselves  the  benefit  of  a 
renewal  to  the  exclusion  of  the  other  parties  interested  with  them." 
In  Clegg  v.  Edmondson  (8  De  G.,  McN'.  &  G.  787)  the  managing 
partners  of  a  mining  partnership  at  will  gave  notice  of  dissolution  to 
the  rest,  and  intimated  their  intention,  after  the  dissolution,  to 
apply  for  a  new  lease  for  their  own  exclusive  benefit,  and  did  so  and 
obtained  a  lease,  and  it  was  held  to  enure  to  the  benefit  of  the  partner- 
ship. See,  also,  the  leading  cases  of  Feather stonhaugh  v.  Fenwick 
(17  Ves.  298)  and  Keeck  v.  Sanford  (2  Eq.  Cas.  Abdg  ,  741),  and  notes 
to  the  latter  case  in  i  Leading  Cases  in  Equity,  32,  where  the  whole 
doctrine  is  discussed  and  conclusion  reached  in  harmony  with  the 
views  above  expressed.  I  therefore  conclude  that  it  makes  no 
difference  that  these  leases  were  obtained  for  a  term  to  commence 
after  the  partnership,  by  its  own  limitation,  was  to  terminate.  I  can 
find  no  authority  holding  that  it  does,  and  there  is  no  principle  sus- 
taining the  distinction  claimed.  The  defendant  was  in  possession 
as  a  member  of  the  firm,  and  the  firm  owned  the  good  will  for  a 
renewal,  which  ordinarily  attaches  to  the  possession.  By  his  occu- 
pancy, and  the  payment  of  the  rent,  he  was  brought  into  intimate 
relations  with  the  lessors;  he  became  well  acquainted  with  the  value  of 
the  premises  and  he  took  advantage  of  hh  position,  during  the  partner- 
ship, secretly  to  obtain  the  new  leases.  He  must  hold  them  for  the  firm. 
I  am  therefore  of  the  opinion  that  the  judgment  should  be  re- 
versed, and  new  trial  granted,  costs  to  abide  the  event. 


574  LAW  AND  BUSINESS 

QUESTIONS 

1 .  What  is  meant  when  it  is  said  that  the  relation  between  partners  is  one 
of  trust  and  confidence  ? 

2.  A  and  B,  partners,  are   negotiating  with  X  for  the  purchase  of  a  piece 
of  reality.     X  gives  A  five  hundred  dollars  as  a  commission  for  inducing 
B  to  agree  to  the  purchase.     What  are  the  rights  of  the  firm,  if  any, 
against  A  ? 

3.  A  and  B  are  partners  engaged  in  buying  and  selling  real  estate  for  profit. 
A  buys  a  piece  of  land  on  his  own  account  and  resells  it  at  a  profit  of 
$1,500  without  the  knowledge  of  A.     What  are  the  rights  of  the  firm, 
if  any,  against  A  ? 

4.  A,  B,  and  C  enter  into  a  partnership  for  the  purpose  of  carrying  on  a 
retail  dry  goods  store.     In  the  articles  of  partnership  it  is  agreed  that 
each  partner  shall  devote  his  undivided  time  and  attention  to  the  affairs 
of  the  partnership.     A,  however,  becomes  a  partner  with  X  and  Y  in 
the  real  estate  business  to  which  he  devotes  several  hours  in  the  evening 
after  the  dry  goods  store  is  closed.     What  are  the  rights  of  the  firm,  if 
any,  against  A  ? 

5.  It  is  expressly  agreed  between  the  partners  that  credit  will  not  be 
extended  to  anyone  without  the  consent  of  all.     B  in  violation  of  this 
agreement  extends  credit  to  D.     The  .firm  is  unable  to  collect  from  D. 
What  are  the  rights  of  the  firm,  if  any,  against  B  ? 

6.  P  recovers  a  judgment  of  $5,000  against  the  firm  and  secures  satisfaction 
of  the  judgment  against  the  individual  estate  of  C.     What  are  the  rights 
of  C  under  the  circumstances  ? 

7.  It  is  said  that  each  partner  is  entitled  to  a  complete  accounting  from  his 
copartners.     What  is  meant  by  this  statement  ? 


CHAPTER  VI 

RESPONSIBILITY  FOR  TORTS  AND  CRIMES 

NIMS  v.  MOUNT  HERMON  BOYS'  SCHOOL 

1 60  Massachusetts  Reports  177  (1893) 

KNOWLTON,  J.  The  defendant  is  an  educational  corporation. 
The  plaintiff  seeks  to  recover  damages  for  an  injury  received  through 
the  negligence  of  a  ferryman  in  managing  a  boat  on  which  he  was  a 
passenger,  and  which,  as  he  alleges,  the  defendant  was  using  at  a 
public  ferry  in  the  business  of  carrying  passengers  for  hire.  At  the 
request  of  the  defendant,  the  presiding  justice  ruled  that  there  was 
no  evidence  to  warrant  a  finding  for  the  plaintiff,  and  directed  a 
verdict  for  the  defendant.  The  defendant  contends  that  the  ruling 
should  be  sustained  on  one  or  both  of  two  grounds.  It  says  in  the 
first  place,  that,  if  it  maintained  the  ferry  and  hired  and  paid  the 
ferryman,  the  business  was  ultra  vires  and  therefore  it  is  not  liable 
for  negligence  in  the  management  of  the  boat.  Secondly,  it  contends 
that  there  was  no  evidence  to  connect  the  corporation  with  the 
business  of  running  the  ferry-boat,  or  to  show  that  the  ferryman  was 
its  servant. 

It  is  a  general  rule  that  corporations  are  liable  for  their  torts  as 
natural  persons  are.  It  is  no  defense  to  an  action  for  a  tort  to  show 
that  the  corporation  is  not  authorized  by  its  charter  to  do  wrong. 
Recovery  may  be  had  against  corporations  for  assault  and  battery, 
for  libel  and  for  malicious  prosecution,  as  well  as  for  torts  resulting 
from  negligent  management  of  the  corporate  business.  Moore  v. 
Fitchburg  Railroad,  4  Gray,  465;  Reed  v.  Home  Savings  Bank,  130 
Mass.  443;  Merchant's  Bank  v.  State  Bank,  10  Wall.  604;  National 
Bank  v.  Graham,  100  U.S.  699. 

If  a  corporation  by  its  officers  or  agents  unlawfully  injures  a 
person  whether  intentionally  or  negligently,  it  would  be  most  unjust 
to  allow  it  to  escape  responsibility  on  the  ground  that  its  act  is  ultra 
vires.  The  only  plausible  ground  on  which  the  defendant  in  the 
present  case  can  contend  that  it  should  be  exempt  from  liability  for 
the  negligence  of  its  servant  in  managing  the  ferry-boat  is  that  the 
contract  to  carry  the  plaintiff  was  ultra  vires,  and  therefore  invalid, 

575 


576  LAW  AND  BUSINESS 

and  that  the  duty  for  neglect  of  which  the  plaintiff  sues  arose  out 
of  the  contract,  and  disappears  with 'it  when  the  contract  appears  to 
be  void.  The  defendant  may  argue  that  the  plaintiff  cannot  maintain 
an  action  for  a  breach  of  the  contract  to  use  proper  care  to  carry  him 
safely  and  that  he  stands  no  better  when  he  sues  in  tort  for  failure  to 
do  the  duty  which  grew  out  of  the  contract. 

In  Bissell  v.  Michigan  Southern  &  Northern  Indiana  Railroad, 
22  N.Y.  258,  the  plaintiff  founded  his  action  on  the  negligence  of  the 
two  defendants  while  jointly  running  cars  on  a  railroad  in  a  state  to 
which  the  charter  of  neither  of  them  extended,  and  it  was  conceded 
that  the  defendants  were  acting  ultra  vires.  The  plaintiff  recovered, 
COMSTOCK,  C.  J.,  holding,  in  an  elaborate  opinion  that  the  corpo- 
rations were  liable  under  their  contract,  notwithstanding  that  the 
contract  was  ultra  vires,  and  that  if  they  could  not  be  held  under  their 
contract  they  could  not  be  held  at  all,  inasmuch  as  the  only  negligence 
alleged  was  a  failure  to  use  the  care  which  the  contract  called  for. 
SELDEN,  J.,  in  an  equally  full  and  elaborate  opinion,  held  that  the 
contract  for  carriage  was  invalid,  and  that  there  could  be  no  recovery 
under  it,  nor  for  negligence  founded  upon  it;  but  it  was  his  opinion 
that,  if  the  contract  was  invalid,  and  that  there  could  be  no  recovery 
under  it,  nor  for  negligence  founded  upon  it;  but  it  was  his  opinion 
that,  if  the  control  were  set  aside,  the  defendants  owed  the  plaintiff  a 
duty  founded  on  his  relation  to  them  as  an  occupant,  with  their 
permission,  of  a  place  in  their  car,  and  that  the  improper  manage- 
ment of  the  car  was  a  neglect  of  that  duty  for  which  the  plaintiff 
could  recover.  CLARKE,  J.,  agreed  with  the  view,  and  all  but  one  of 
the  other  judges  concurred  .in  a  decision  for  the  plaintiff,  without 
stating  the  ground  on  which  they  thought  the  decision  should  be 
placed.  This  case  was  followed  in  Buffett  v.  Troy  &°  Boston  Railroad, 
40  N.Y.  1 68,  in  which  it  was  held  that  a  railroad  corporation  was 
liable  for  negligence  of  the  driver  of  a  stage-coach  which  it  was  run- 
ning without  a  legal  right  to  do  a  business  of  that  kind;  but  the 
opinion  does  not  show  whether  the  decision  is  founded  on  the  opinion 
of  COMSTOCK,  C.  J.,  given  in  the  former  case,  or  on  that  of  SELDEN, 
J.  Like  decisions  have  been  made  under  similar  facts  in  Central 
Railroad  &  Banking  Co.  v.  Smith,  76  Ala.  572;  New  York,  Lake  Erie 
&  Western  Railway  v.  Haring,  18  Vroom,  137. 

The  better  doctrine  seems  to  be  that  a  contract  made  by  a  cor- 
poration in  violation  of  its  charter,  or  in  excess  of  the  powers  granted 
to  it  either  expressly  or  implication,  is  invalid,  considered  merely  as  a 


RESPONSIBILITY  FOR  TORTS  AND  CRIMES  577 

contract,  and,  so  long  as  it  is  entirely  executory,  will  not  be  enforced. 
It  is  not  only  a  violation  of  a  private  trust,  viewed  in  reference  to  the 
stockholders,  but  it  is  against  the  policy  of  the  law,  which  intends 
that  corporations  deriving  their  powers  solely  from  the  legislature  shall 
not  pass  beyond  the  limits  of  the  field  of  activity  in  which  they  are 
permitted  by  their  charter  to  work.  Monument  National  Bank  v. 
Globe  Works,  101  Mass.  57;  Attorney-General  v.  Ice  Co.,  104  Mass. 
239;  Davis  v.  Old  Colony  Railroad,  131  Mass.  258;  Leslie  v.  Lorillard, 
1 10  N.Y.  519;  East  Anglion  Railways  v.  Eastern  Counties  Railways, 
n  C.B.  775.  On  the  other  hand,  courts  have  frequently  held  that, 
while  such  contracts  considered  merely  as  contracts  are  invalid,  they 
involve  no  such  element  of  moral  or  legal  wrong  as  to  forbid  their 
enforcement  if  there  has  been  such  action  under  them  as  to  work 
injustice  if  they  are  set  aside.  Courts  have  been  astute  to  discover 
something  in  the  nature  of  an  equitable  estoppel  against  one  who,  after 
entering  into  such  a  contract,  and  inducing  a  change  of  condi- 
tion by  another  party,  attempts  to  avoid  the  contract  by  a  plea  of 
ultra  vires.  It  is  said  that  such  a  plea  will  not  avail  when  to  allow 
it  would  work  injustice  and  accomplish  legal  wrong.  Leslie  v. 
Lorillard,  no  N.Y.  519;  Lindauf  v.  Lombard,  137  N.Y.  417.  Many 
cases  might  be  supposed  in  which  it  would  be  most  unjust  to  hold 
that  one  who  has  received  the  benefits  of  such  a  contract  might  retain 
them  and  leave  the  other  party  without  remedy,  as  he  might  do  in  a 
supposable  case,  where  another  had  put  himself  at  a  disadvantage  on 
the  faith  of  a  contract  with  him  to  commit  a  crime.  Whether  in  this 
Commonwealth  a  contract  entered  into  by  a  corporation  ultra  vires, 
and  partly  performed,  will  ever  be  enforced  on  equitable  grounds,  we 
need  not  now  decide.  See  McCluer  v.  Manchester  &  Lawrence  Rail- 
road, 13  Gray,  124;  National  P  ember  ton  Bank  v.  Porter,  125  Mass. 
333;  Atlas  National  Bank  v.  Saver y,  127  Mass.  75;  National  Bank  v. 
Matthews,  98  U.S.  621;  Oil  Creek  &  Allegheny  River  Railroad  v. 
Pennsylvania  Transportation  Co.,  83  Penn.  St.  160.  In  the  present 
case  we  think  it  makes  no  difference  that  the  defendant  was  not  a 
manufacturing  or  trading  corporation,  but  was  chartered  for  educa- 
tional purposes  only.  It  could  acquire  and  hold  property,  make  con- 
tracts, and  do  anything  else  incidental  to  the  maintenance  of  the  school' 
Doubtless  some  of  its  officers  or  agents  thought  it  would  be  an  advan- 
tage to  its  students  and  managers  to  have  a  public  ferry  at  the  place 
where  the  plaintiff  was  injured.  Its  maintenance  of  such  a  ferry  was 
ultra  vires,  but  its  acts  in  that  respect  were  not  different  in  kind 


578  LAW  AND  BUSINESS 

from  the  ordinary  acts  of  corporations  in  excess  of  the  powers  given 
them  by  their  charters.  We  are  of  opinion,  therefore,  that  if  the 
defendant  while  running  the  ferry-boat  accepted  the  plaintiff  as  a 
passenger  to  be  transported  for. hire,  and  undertook  to  carry  him 
across  the  river,  he  was  in  the  boat  as  a  licensee, .it  owed  him  the  duty 
to  use  proper  care  to  carry  him  safely,  and  whether  an  action  could 
be  maintained  for  a  breach  of  the  contract  or  not,  it  is  liable  to  the 
plaintiff  in  an  action  of  tort  for  neglect  of  that  duty. 

QUESTIONS 

1.  The  D  Company,  a  corporation  engaged  in  the  newspaper  business, 
published  an.  actionable  libel  concerning  P.     P  sues  the  company  for 
damages.     What  decision  ? 

2.  X,  an  employee  of  the  D  Company,  while  collecting  bills,  unnecessarily 
assaults  P.     P  sues  the  corporation  for  damages.     What  decision  ? 

3.  X,  an  employee  of  the  D  Company,  while  operating  a  switch  engine, 
negligently    injures    P.     P    sues    the    company    for    damages.     What 
decision  ? 

4.  What  was  the  decision  of  the  court  in  the  case  of  Bissell  v.  Michigan 
Southern  &  Northern  Indiana  Railroad,  22  N.Y.  253,  cited  in  the  opinion 
of  the  principal  case  ? 

STATE  v.  LEHIGH  VALLEY  RAILROAD  COMPANY 

90  New  Jersey  Law  Reports  372  (1917) 

SWAYZE,  J.  It  has  long  been  settled  in  this  state  that  a  corpora- 
tion, aggregate  may  in  a  proper  case  be  held  criminally  for  acts  of 
malfeasance  as  well  as  for  nonfeasance.  State  v.  Morris  &  Essex 
Railroad  Co.,  23  NJ.L.  360;  State  v.  Passaic  County  Agricultural 
Society,  54  Id.  260.  So  well  settled  is  the  general  rule  that  in  the 
later  cases  it  has  not  been  even  questioned.  State  v.  Erie  Railroad  Co., 
83  Id.  231;  84  Id.  661;  State  v.  Lehigh  Valley  Railroad  Co.,  89  Id. 
48;  ante,  page  340.  Notwithstanding  these  decisions  it  is  now 
argued  that  a  corporation  aggregate  cannot  be  held  criminally  for 
manslaughter. 

We  need  not  consider  whether  the  modification  of  the  common 
law  by  our  decisions  is  to  be  justified  by  logical  argument;  it  is  con- 
fessedly a  departure  at  least  from  the  broad  language  in  which  the 
earlier  definitions  were  stated,  and  a  departure  made  necessary  by 
changed  conditions  if  the  criminal  law  was  not  to  be  set  at  naught 
in  many  cases  by  contriving  that  the  criminal  act  should  be  in  law 


RESPONSIBILITY  FOR  TORTS  AND  CRIMES  579 

the  act  of  a  corporation.  The  modern  rule,  as  well  as  the  reasons  for 
it,  was  so  well  stated  by  CHIEF  JUSTICE  GREEN,  in  the  earliest  case 
above  cited,  that  his  opinion  may  fairly  be  said  to  be  the  classical 
judicial  deliverance  on  the  subject.  The  CHIEF  JUSTICE  recognized 
that  there  were  certain  crimes,  for  example,  perjury,  of  which  a 
corporation  cannot  in  the  nature  of  things  be  guilty;  and  there  were 
other  crimes,  for  example,  treason  and  murder,  for  which  the  only 
punishment  imposed  by  law  cannot  be  inflicted  upon  a  corporation; 
he  added,  however,  without  any  specific  illustration  that  a  corporation 
could  not  be  liable  for  any  crime  of  which  a  corrupt  intent  or  mains 
animus  is  an  essential  ingredient.  We  need  not  consider  what  crimes 
may  be  included  under  the  last  exception.  It  is  enough  to  say  that 
the  case  is  an  authority  which  we  are  not  at  liberty  to  question,  and 
would  not  question  if  we  might,  for  the  proposition  that  a  corporation 
aggregate  may  be  held  criminally  for  criminal  acts  of  misfeasance  or 
nonfeasance  unless  there  is  something  in  the  nature  of  the  crime,  the 
character  of  the  punishment  prescribed  therefor,  or  the  essential 
ingredients  of  the  crime,  which  makes  it  impossible  for  a  corporation 
to  be  held.  Involuntary  manslaughter  does  not  come  within  any  of 
these  exceptions.  It  may  be  the  result  of  negligence  merely  and 
arise  out  of  mere  nonfeasance.  That  a  corporation  may  be  guilty  of 
negligence  is  now  elementary;  that  it  could  be  held  criminally  for 
nonfeasance  was  settled  by  numerous  precedents  cited  by  the  CHIEF 
JUSTICE  (at  pp.  364,  365).  We  think  of  no  reason  why  it  should 
not  be  held  for  the  criminal  consequences  of  its  negligence  or  its  non- 
feasance.  There  is  nothing  in  the  punishment  prescribed  which 
makes  it  impossible  to  punish  a  corporation.  Section  109  of  the 
Crimes  Act  prescribes  in  the  alternative  a  fine  of  $1,000  or  imprison- 
ment not  exceeding  ten  years,  or  both.  Clearly,  a  corporation  may 
be  punished  by  way  of  fine.  The  punishment  is  prescribed  only  for 
persons,  but  by  section  9  of  the  act  relative  to  statutes  the  word 
" person"  is  declared  to  include  bodies  corporate  (artificial  persons) 
as  well  as  individuals  (natural  persons)  and  the  same  provision  in 
a  somewhat  different  form  appears  in  section  220  of  the  Crimes  Act. 
It  is  argued  that  the  essential  ingredients  of  manslaughter  make 
it  impossible  to  hold  a  corporation  therefor.  The  crime  was  a  felony 
at  common  law  and  some  of  the  old  authorities  define  homicide  as  the 
killing  of  one  human  being  by  another  human  being;  that  manslaughter 
was  a  felony  at  common  law  is  not  to  the  point,  since  "  the  distinction 
between  felonies  and  misdemeanors  is  not  observed  in  our  criminal 


580  LAW  AND  BUSINESS 

code."  Jackson  v.  State  49  N.J.L.  252;  Brown  v.  State,  62  Id.  666 
(at  p.  695). 

Although  it  may  be  necessary  in  applying  some  of  the  old  legal 
rules  to  our  jurisprudence,  to  regard  certain  crimes  called  by  our 
statute  misdemeanors,  as  the  equivalent  of  felonies  for  the  applica- 
tion of  common-law  rules,  that  necessity  is  one  of  terminology  only; 
otherwise,  there  is  now  in  this  state  no  essential  distinction  between 
the  two  grades  of  offense  known  to  the  common  law.  We  are  unable 
to  attribute  to  the  ancient  classification  of  manslaughter  as  a  felony, 
the  force  in  our  modern  jurisprudence  which  counsel  claims  for  it. 

As  to  the  definition  of  homicide  cited  by  counsel,  it  is  enough  to 
say  that  authorities  of  equal  eminence  define  it  differently.  Black- 
stone,  for  example,  hi  the  passage  cited  in  the  brief  (4  Bl.  Com.  188), 
defines  felonious  homicide  as,  "the  killing  of  a  human  creature,  of 
any  age  or  sex,  without  justification  or  excuse."  He  then  adds  by 
way  of  illustration:  "This  may  be  done  either  by  killing  one's  self, 
or  another  man."  Blackstone  does  not  say  that  these  are  the  only 
cases  of  felonious  homicide;  as  far  as  his  text  goes,  the  case  of  invol- 
untary manslaughter  by  a  corporation  aggregate  is  not  excluded,  and 
is  within  the  words  of  his  definition.  But  if  we  assume,  as  is  probably 
the  fact,  that  Blackstone  did  not  have  in  mind  the  case  of  involuntary 
manslaughter  by  a  corporation  aggregate  as  a  possible  case  of  felonious 
homicide,  nevertheless,  his  illustration  of  suicide  as  a  felonious  homi- 
cide shows  that  the  definition  relied  upon  (killing  of  one  human  being 
by  another  human  being)  is  inaccurate.  We  need  not  italicize  the 
word  "another"  to  show  the  conflict. 

We  do  not  forget  that  voluntary  manslaughter  involves  ingredients 
quite  different  from  those  involved  in  involuntary  manslaughter. 
The  indictment  is  in  statutory  form.  Under  the  statute  there  is  no 
difference  between  an  indictment  for  voluntary,  and  an  indictment 
for  involuntary,  manslaughter,  and  a  defendant  may  be  convicted  of 
either.  State  v.  Thomas,  65  N.J.L.  598.  If  his  constitutional  right 
to  be  informed  of  the  nature  and  cause  of  the  accusation  were  not 
sufficiently  protected  by  the  form  of  indictment  prescribed  by  the 
statute,  the  obligation  is  not  available  to  the  present  defendant, 
who  has  been  furnished  with  a  bill  of  particulars  showing  that  the 
charge  relied  upon  is  that  of  involuntary  manslaughter. 

We  have  examined  the  authorities  in  other  jurisdictions  to  which 
we  were  referred.  The  decision  of  People  v.  Rochester  Railway  &• 
Light  Co.,  195  N.Y.  102;  88  N.E.  Rep.  22;  reported  with  note,  16 


RESPONSIBILITY  FOR  TORTS  AND  CRIMES  581 

Ann.  Cas.  837,  was  based  entirely  upon  the  construction  of  the  exact 
language  of  the  penal  code,  which  denned  homicide  as  "the  killing  of 
one  human  being  by  the  act,  procurement  or  omission  of  another," 
and  the  court  necessarily,  we  think,  held  that  "another"  meant 
"another  human  being."  But  JUDGE  HISCOCK,  now  the  eminent 
CHIEF  JUDGE,  who  spoke  for  the  court,  was  at  some  pains  to  show 
that  there  was  nothing  essentially  incongruous  in  holding  a  corpora- 
tion aggregate  criminally  liable  for  manslaughter.  The  case  is  a 
good  illustration  of  the  way  in  which  the  proper  growth  and  develop- 
ment of  the  law  can  be  prevented  by  the  hard  and  fast  language  of  a 
statute,  and  of  the  advantage  of  our  own  system  by  which  the  way 
is  open  for  a  court  to  do  justice  by  the  proper  application  of  legal 
principles. 

The  case  of  Commonwealth  v.  Illinois  Central  Railroad  Co.,  152 
Ky.  320;  153  S.W  Rep.  459,  rests  on  the  inaccurate  definition  of 
homicide  to  which  we  have  already  referred. 

The  case  of  Regina  v.  Great  Western  Laundry  Co.,  13  Man.  66, 
rests  chiefly  on  the  absence  of  precedent.  We  cannot  avoid  the  feel- 
ing that  the  learned  judge  attributed  too  much  importance  to  this 
lack.  We  think  the  true  question  is  whether  the  indictment  is  in 
harmony  with  established  legal  principles,  as  we  think  it  is;  we  are 
not  troubled  by  the  fact  that  the  case  is  one  of  first  impression  in 
New  Jersey. 

It  is  urged  that  the  indictment  should  at  least  be  quashed  as  to 
all  the  defendants  except  the  Lehigh  Valley  Railroad  Co.,  since  the 
bill  of  particulars  is  directed  at  that  defendant  only.  An  indictment 
otherwise  valid  cannot  be  vitiated  by  the  bill  of  particulars,  although 
some  motion  depending  on  the  latter  may  properly  be  raised  at  the 
trial.  Moreover,  a  motion  to  quash  is  addressed  to  our  discretion. 
State  v.  Pisanello,  88  N.J.L.  262'.  That  discretion  ought  not  to  be 
exercised  in  a  case  like  this  where  injustice  may  be  done  thereby  to 
the  state  and  where  the  refusal  to  exercise  it  deprives  the  defendants 
of  no  substantial  rights,  since  the  question  can  be  raised  at  the  trial. 

The  motion  to  quash  is  denied.  Let  the  record  be  remitted  to 
the  Hudson  Quarter  Sessions  for  trial. 

QUESTIONS 

i.  A  statute  makes  it  a  punishable  offense  for  "any  person  to  sell  cigarettes 
.  to  minors."     The  D   Company,  being  indicted  for  a  violation  of  this 
statute,  demurs  to  the  indictment.    What  decision  ? 


582  LAW  AND  BUSINESS 

2.  X,  an  employee  of  the  corporation,  while  acting  for  the  corporation, 
assaults  P.    The  corporation  is  indicted  for  a  criminal  assault.    It  demurs 
to  the  indictment.    What  decision  ? 

3.  The  corporation  is  indicted  for  criminal  libel.    It  demurs  to  the  indict- 
ment.   What  decision  ? 

4.  The  corporation  is  indicted  for  perjury.    It  demurs  to  the  indictment. 
What  decision  ? 

5.  The  corporation  is  indicted  for  manslaughter.     The  only  punishment 
provided  for  manslaughter  in  the  state  in  question  is  imprisonment. 
The  corporation  demurs  to  the  indictment.     What  decision  ? 

6.  A,  B,  and  C  are  partners.    A,  while  purporting  to  act  for  the  firm, 
commits  a  crime.    A,  B,  and  C  are  separately  indicted  for  the  crime. 
Each  demurs  to  the  indictment.     What  decision  ? 


GUARANTEE   TRUST  AND   SAFE   DEPOSIT   COMPANY  v. 
E.  C.  DREW  INVESTMENT  COMPANY 

107  Louisiana  Reports  251  (1901) 

PROVOSTY,  J.  The  defendant  firm,  the  E.  C.  Drew  Investment 
Co.,  was  engaged  in  the  business  of  buying  and  selling  lands  and  timber 
and  of  acting  as  agent  for  the  owners  of  lands  and  timber  in  selling 
the  same.  It  bargained  with  the  codefendant,  Manning  S.  Maguire, 
for  the  sale  to  him  of  timber,  and  referred  him  to  its  agent  Lee  Harris, 
one  of  the  defendants,  to  point  out  the  timber  and  agree  upon  a  price. 
Harris  pointed  out  the  timber  of  plaintiff,  and  Maguire  cut,  removed, 
and  sold  the  same.  And  this  suit  is  for  damages  against  all  said 
parties  and  against  the  members  of  the  E.  C.  Drew  Co.  individually, 
in  solido,  upon  allegations  of  conspiracy  to  depredate  upon  plaintiff's 
lands. 

Maguire  pleads  the  general  denial,  and  that  he  bought  the  timber 
in  good  faith.  The  E.  C.  Drew  Investment  Co.  and  the  members 
individually  plead  the  general  denial,  and  also  that  the  timber  sold 
by  them  was  on  their  own  property.  They  specially  deny  the  allega- 
tions of  conspiracy. 

We  think  that  Maguire  bought  the  timber  in  good  faith.  Drew 
&  Co.  were  a  reputable  firm  selling  timber  for  their  own  account  and 
for  others;  to  deal  with  them  was  in  regular  course.  Maguire  was 
under  no  obligation  to  investigate  their  authority;  our  law  does  not 
expect  that  suspicion  and  distrust  shall  inspire  the  conduct  of  our 
business  men  in  dealing  with  each  other,  but  rather  an  honest 


RESPONSIBILITY  FOR  TORTS  AND  CRIMES  583 

business  confidence.  Good  faith,  says  our  code,  is  presumed  until 
disproved. 

For  certain  purposes  registry  conveys  notice,  or  knowledge,  and 
defendant's  counsel  argues  that  the  registry  of  plaintiff's  title  conveyed 
to  Maguire  knowledge  that  Drew  &  Co.  were  not  owners  of  the  land. 
Counsel  cites  in  support  of  this  contention  the  case  of  Heirs  of  Dohan  v. 
Murdoch,  41  Ann.  494.  The  case  is  good  authority  against  the  con- 
tention of  counsel.  See  also  the  cases  of  4  La.  474;  5  La.  242;  33 
Ann.  769;  38  Ann.  885;  and  Heirs  of  Ford  v.  Phillips,  47  Ann.  339. 

The  E.  C.  Drew  Investment  Co.  and  the  individual  members 
thereof  must  be  held  liable  to  plaintiff  as  trespassers  in  bad  faith. 
The  sale  of  the  timber  was  made  advisedly;  and  it  was  made  in  the 
course  of  the  partnership  business,  by  the  managing  partner  of  the 
firm,  in  the  name  of  and  for  the  benefit  of  the  firm;  and  the  price 
went  into  the  coffers  of  the  firm.  Under  these  facts  all  the  partners 
are  liable. 

The  defenses  are,  first,  that  Drew  did  not  authorize  Harris  to 
sell  the  timber  on  the  land  of  plaintiff,  but  only  the  timber  on  the  land 
of  the  E.  C.  Drew  Investment  Co.;  and,  second,  on  the  part  of  the 
individual  members  of  the  firm,  that  they  had  no  knowledge  of  the 
transaction,  and,  as  a  consequence,  are  not  parties  to  it  and  are  not 
responsible  for  it. 

If  it  were  conceded  that  Harris  in  selling  the  timber  of  plaintiff 
transcended  his  authority,  still,  on  familiar  principles,  the  partner- 
ship would  be  liable  since  the  act  was  done  in  the  course  of  the  execu- 
tion of  the  agency. 

But,  as  a  matter  of  fact,  Harris  did  not  transcend  his  authority. 
When  he  made  the  sale  he  had  in  his  possession  a  map  on  which  were 
marked  the  lands  of  the  Drew  Co.,  and  among  these  the  lands  of  the 
plaintiff  figured;  and  he  testifies  that  this  map  was  given  him  by 
Drew  for  his  guidance  in  making  the  sale.  If  so,  he  did  not  transgress 
his  authority.  Drew  was  not  permitted  to  testify  on  the  trial,  as  to 
whether  he  had,  or  not,  given  such  a  map  to  Harris,  the  court  holding 
that  the  point  was  settled  by  a  judgment  on  a  rule  taken  on  Drew 
early  in  the  case  to  produce  the  map ;  which,  it  seems,  had  been  left 
by  Harris  in  the  office  of  the  Drew  Co.  Whether  this  ruling  was 
correct  or  not,  need  not  be  considered,  for  if  we  assumed  that  Drew 
had  testified  and  had  denied  most  positively  and  circumstantially 
that  he  had  given  the  map,  we  should  accept  the  statement  of  Harris 
on  the  subject;  and  this  for  two  reasons:  First,  that  it  accords  with 


584  LAW  AND  BUSINESS 

the  attending  circumstances  of  the  case;  and,  secondly,  that  on  the 
trial  of  the  rule  in  question  Drew  testified  that  he  did  not  "exactly 
remember"  whether  he  had  given  any  map  at  all  to  Harris;  and,  of 
course,  this  absence  of  recollection  could  not  well  be  reconciled  with  a 
subsequent  positive  denial. 

The  want  of  knowledge  on  the  part  of  a  member  of  a  firm  of  the 
tort  of  his  copartner  will  not  be  good  ground  for  exemption  from  lia- 
bility for  such  tort,  if,  as  in  this  case,  the  tort  was  committed  in  the 
course  of  the  partnership  business,  and  in  the  name  of  and  for  the 
benefit  of  the  partnership; .  and  especially  if  the  partnership  profited 
by  the  transaction. 

In  combatting  this  proposition,  counsel  for  defendant  cite  Addison 
on  Torts,  Volume  i,  page  667,  as  follows: 

"One  partner  cannot  drag  another  into  a  trespass  without  his 
previous  consent,  or  without  his  subsequent  concurrence.  It  must 
be  shown,  either  by  evidence  before  the  transaction  that  they  joined 
in  committing  the  trespass,  or  by  evidence  afterwards  that  they  con- 
curred in  and  received  the  benefit  of  it." 

If  by  this  is  meant  merely  what  is  said,  namely,  that  as  a  general 
proposition  one  partner  cannot  drag  his  copartners  without  their 
consent  into  every  trespass  which  he  may  choose  to  indulge  in,  we 
have  nothing  to  say;  but  if  it  is  meant  to  contradict  the  proposition 
laid  down  above,  then  we  must  call  upon  the  author  to  cite  his  authori- 
ties. Two  cases  are  referred  to  by  him  in  his  marginal  notes  in  support 
of  the  text.  One  of  these  cases,  Petrie  v.  Lamont,  we  have  not  had 
access  to;  the  other,  Chester  v.  Dicker  son,  et  al.,  54  N.Y.  i,  was  cited 
either  by  mistake,  or  as  a  case,  contra;  for  it  certainly  does  not 
support  the  text.  One  of  the  members  of  a  partnership  between 
dealers  in  real  estate  poured  petroleum  upon  a  tract  of  land  to  induce 
plaintiff  to  believe  that  it  was  oil-producing  land,  and  sold  the  land 
to  plaintiff  as  of  that  character,  all  without  the  knowledge  of  his 
copartners:  held,  syllabus,  as  follows: 

"Where  a  fraud  is  perpetrated  by  one  of  the  members  of  such 
partnership  in  the  prosecution  of  a  partnership  enterprise,  all  the 
partners  are  liable,  although  the  others  had  no  connection  with,  knowl- 
edge of,  or  participation  in  the  fraud." 

Thus  it  is  seen  that  the  case  does  not  support  the  text.  But 
counsel  cite  one  of  our  decisions,  Allen,  Nugent  &°  Co.  v.  Carey,  et  al., 
33  Ann.  1455,  as  supporting  the  text  in  question.  On  examination 
it  will  be  found  that  that  case  is  authority  for  nothing  more  than  that 


RESPONSIBILITY  FOR  TORTS  AND  CRIMES  585 

a  partner  cannot  bind  the  firm  as  security  for  the  debt  of  himself  or 
of  a  third  person,  outside  of  the  course  of  the  partnership  business. 

The  proposition  laid  down  by  us  above  is  well  supported  by 
authority. 

In  the  American  and  English  Encyclopedia  of  Law,  Volume  17, 
page  1067,  we  find  the  following: 

"  While  the  willful  and  malicious  torts  of  a  member  of  a  firm  are 
not  usually  within  the  scope  of  his  employment,  and  consequently 
do  not  render  his  partners  liable,  yet  if  such  an  act  is  committed  clearly 
and  plainly  for  the  benefit  of  all,  and  in  the  usual  and  ordinary  prosecu- 
tion of  the  partnership  business,  all  are  liable,  notwithstanding  the 
malicious  motives  of  the  partner  committing  the  act." 

Story,  treating  the  same  subject,  after  discussing  the  liability  as 
deduced  from  the  maxim,  qui  facit  per  alium  facit  per  se,  goes  on,  as 
follows : 

"The  doctrine  has  been  carried  further;  and  the  partnership  has 
been  held  for  libel  which  was  published  and  sold  by  one  partner  in 
the  course  of  the  business  of  the  firm,  as,  for  example,  by  a  printer  or 
bookseller,  one  of  the  firm  in  that  business.  The  same  rule  might 
apply  to  cases  of  written  slander,  as  by  declaring  a  rival  merchant  a 
bankrupt,  or  a  cheat,  if  written  in  the  name,  and  as  an  act,  of  the 
firm.  So,  if  breaches  of  the  revenue  laws  by  fraudulent  importa- 
tions, or  smuggling,  or  entries  at  the  customhouse,  are  committed  by 
one  of  the  firm  in  the  course  of  the  business  thereof,  all  of  the  firm 
would  be  liable  penally,  as  well  as  civilly,  therefor."  Story  on 
Partnership,  para.  166. 

In  a  note  on  page  149  of  Lindley  on  Partnership,  Wentworth's 
notes,  we  find  the  law  on  the  subject  stated,  as  follows: 

"Partners  are  liable  in  civil  actions  upon  the  principle  of  agency 
for  the  fraudulent  or  malicious  conduct  of  one  of  their  members  done 
without  the  knowledge  of  the  others  for  the  benefit  of  the  partnership 
and  within  the  scope  of  its  business."  Citing  a  long  list  of  cases. 

In  the  case  of  Stockwell  v.  United  States,  13  Wallace,  491,  the 
defendants  were  sued  as  members  of  a  partnership  for  double  the  value 
of  certain  shingles  imported  by  the  partnership  without  payment  of 
import  duties.  The  debt  was  by  way  of  penalty  for  breach  of  the 
revenue  laws.  The  fraud  upon  the  government  was  the  act  of  only 
one  of  the  members  of  the  firm,  the  other  members  had  no  knowl- 
edge of  it;  but  the  firm  received  the  shingles,  and  sold  them  in  due 
course  of  business.  It  was  argued  that  the  innocent  members  of  the 


586  LAW  AND  BUSINESS 

firm  could  not  be  charged  with  knowledge  of  the  fraud  of  their 
associate.  The  court  held  that  they  were  liable,  and  in  the  course 
of  the  opinion  said: 

"It  is  not  seriously  denied  that  in  civil  transactions  a  principal 
or  a  partnership  is  affected  by  a  knowledge  of  the  agent  or  copartner, 
and  that  the  knowledge  of  the  agent  is  in  law  attributed  to  his  prin- 
cipal, as  well  as  that  of  the  partner  to  all  the  members  of  the  firm; 
nor  is  it  much  insisted  that  a  principal,  or  a  copartner,  is  not  liable 
for  the  tort  of  an  agent,  or  copartner,  done  without  his  knowledge  or 
authority,  in  suits  brought  by  third  persons  to  recover  compensation 
or  indemnity  for  loss  sustained  in  consequence  of  the  tort;  but  it  is 
argued  that  the  rule  does  not  apply  to  the  case  of  suits  for  a  penalty." 
And  again: 

"That  as  a  general  rule  partners  are  liable  to  make  indemnity  for 
the  tort  of  one  of  their  number,  committed  by  him  in  the  course  of  the 

partnership  business,  is  familiar  doctrine The  tortious  act 

of  the  agent  is  the  act  of  the  principal,  if  done  in  the  course  of  his 
agency,  though  not  directly  authorized.  And  this  is  emphatically 
true  when  the  principals,  as  in  this  case,  have  received  and  appro- 
priated the  benefit  of  the  act." 

The  same  rule  obtains  in  the  civil  law.  We  translate  from  Fuzier 
Herman,  1384,  as  follows: 

"The  responsibility  of  the  principal  for  the  injury  caused  by  his 
agent  is  not  restricted  to  cases  where  the  acts  complained  of  came 
within  the  terms  of  the  agent's  authority;  in  order  that  the  principal 
should  be  responsible  it  is  sufficient  that  the  act  complained  of  should 
be  connected  with  ((se  rattache  d) '  the  object  of  the  agency,  and  that 
it  should  have  been  done  in  the  course  of  the  execution  of  the  agency, 
(a  V  occasion  de  son  execution)" 

Among  the  cases  cited  as  illustrative  of  the  acts  for  which  the 
principal  is  thus  held  to  be  responsible,  we  find  the  following:  Owner 
of  a  line  of  stage-coaches  held  liable  for  damage  caused  by  one  of  its 
drivers  in  diverting  travelers  from  plaintiff's  hotel.  Bordeaux,  29 
Juillet,  1856.  Railway  company  liable  to  government  for  smuggling 
done  by  one  of  the  employees  on  its  trains.  Lyon,  ler.  Juillet, 
1872.  All  members  of  firm  civilly  liable  for  a  forgery  committed  by 
one  of  the  members  in  the  course  of  the  partnership  business.  Alger, 
29  Mai,  1879.  Lessees  of  a  preserve  civilly  liable  for  murder  of  one 
of  the  sublessees  by  one  of  the  special  guards  in  the  course  of  a  hunt- 
ing expedition  in  which  the  murderer  was  taking  part  in  his  capacity 


RESPONSIBILITY  FOR  TORTS  AND  CRIMES  587 

of  guard.  Paris,  19  Mai,  1874.  These  are,  of  course,  the  extreme 
cases,  and  are  given  here,  not  by  way  of  approval,  but  merely  to  show 
how  far  the  doctrine  has  been  carried. 

The  liability  of  the  innocent  partners  is  not  to  be  deduced  entirely" 
and  exclusively  from  the  principles  of  the  law  of  agency.  As  stated 
by  JUDGE  STORY,  supra,  it  "has  been  carried."  It  derives  also  to 
some  extent  from  the  equity  of  making  the  loss  fall,  as  between  two 
innocent  parties,  on  the  one  of  the  two  who  contributed  to  bring  it 
about.  By  holding  themselves  out  as  members  of  the  firm  of  Drew  & 
Co.,  the  defendants  gave  business  standing  to  the  concern,  thereby 
contributing  to  the  tort.  If  it  had  not  been  for  the  prestige  given 
by  them  to  the  firm,  Maguire  might  not  have  dealt  with  Drew,  or, 
at  least,  might  have  been  more  cautious.  In  fact,  Drew,  standing 
by  himself,  might  have  been  entitled  to  so  little  confidence  that  in 
dealing  with  him  Maguire  might  have  exposed  himself  to  the  imputa- 
tion of  bad  faith.  We  do  not  wish  to  be  understood  as  saying  that 
such  was  the  case,  but  only  that  such  might  have  been  the  case.  The 
record  does  not  show  what  the  reputation  or  business  standing  of 
Mr.  Drew  were.  For  all  we  know  they  may  have  been  very  good. 
The  fact  that  Maguire  can  find  shelter  behind  the  reputableness  and 
responsibility  which  these  innocent  members  have  contributed  to 
impart  to  the  firm,  shows  that  these  members  are  to  some  extent 
responsible  for  the  tort.  The  liability  of  the  innocent  members  is 
also  founded  in  part  on  motives  of  public  policy.  It  would  be  dan- 
gerous to  the  community  to  allow  a  set  of  men  to  depredate  upon  the 
public  under  the  shelter  of  an  irresponsible  associate;  as  might  be 
done  with  impunity,  if  so-called  innocent  members  of  a  firm  might 
hold  themselves  out  as  members,  and  yet  not  be  liable  for  the  acts  of 
their  partner  in  matters  within  the  scope  of  the  partnership  business. 

The  E.  C.  Drew  Investment  Co.  and  its  members  are,  therefore, 
liable  for  the  timber  sold  at  Monroe,  namely,  $4.50  per  thousand 
feet. 

The  defendants  being  held  for  a  tort,  their  liability  is  in  solido. 
Art.  2324  C.C. 

It  is,  therefore,  ordered,  adjudged,  and  decreed  that  the  judg- 
ment of  the  lower  court  be  set  aside;  and  it  is  now  ordered  adjudged 
and  decreed  that  the  plaintiff,  the  Guarantee  Trustee  and  Safe  Deposit 
Co.,  have  judgment  against  all  of  the  defendants,  namely,  E.  C. 
Drew  Investment  Co.,  Robert  B.  Blanks,  John  B.  Parker,  J.  E. 
Reynolds,  E.  C.  Drew,  Lee  Harris  and  Manning  Maguire,  in  solido, 


588  LAW  AND  BUSINESS 

for  the  sum  of  $330.50  with  legal  interest  from  this  date;  and  against 
all  of  said  parties,  except  Manning  S.  Maguire,  in  solido,  for  the  addi- 
tional sum  of  $2,643,  with  legal  interest  thereon  from  this  date; 
reserving  to  Manning  S.  Maguire  his  right  to  sue  the  proper  parties 
for  the  sum  herein  decreed  to  be  paid  by  him.  The  defendants  to 
pay  the  cost  in  both  courts. 

QUESTIONS 

1.  A,  B,  and  C  are  partners  engaged  in  buying  and  selling  realty.    A,  while 
attempting  to  sell  land  to  P,  fraudently  misrepresented  the  area  of  the 
land.    P  sues  A,  B,  and  C  jointly.    What  decision  ? 

2.  A,  B,  and  C  are  engaged  in  the  retail  furniture  business.     B,  for  adver- 
tising purposes,  against  the  wishes  of  his  copartners,  put  a  piece  of  furniture 

in  the  window  of  the  store,  on  which  he  displayed  this  sign:  "This 
furniture  has  just  been  taken  back  from  P.  It  is  a  warning  to  dead- 
beats."  The  first  statement  was  false.  P  sues  A,  B,  and  C  in  defama- 
tion. What  decision  ? 

3.  A  borrowed  a  horse  from  P  for  the  use  of  the  firm.    He  injured  the 
horse  by  negligent  driving.     What  are  the  rights  of  P  ? 


CHAPTER  VII 

ADJUSTMENT  OF  THE  RIGHTS  OF  CREDITORS 

HAMSMITH  v.  ESPY 
13  Iowa  Reports  439  (1862) 

Hamsmith  commenced  his  action  against  "Thomas  S.  Espy, 
Charles  Baker,  and  John  Robinson,  doing  business  as  partners,  in 
the  name  and  style  of  Espy,  Barker  &  Robinson, "  upon  a  note  made 
in  the  copartnership  name.  After  judgment  against  defendants, 
the  cause  was  brought  into  this  court,  and  at  the  June  term,  1861, 
a  judgment  was  rendered  against  them  in  their  individual  names, 
as  well  their  sureties  on  the  appeal  bond.  An  execution  was  issued, 
and  levied  upon  two  lots  in  Fort  Madison,  one  of  them  belonging 
to  the  firm,  and  the  other  the  individual  property  of  Espy,  who  now 
moves  to  set  aside  this  sale  of  his  lot,  by  showing  that  there  was  other 
firm  property,  of  which  the  sheriff,  and  all  persons  at  the  sale,  had 
notice,  amply  sufficient  to  satisfy  the  writ,  and  which  was  pointed 
out  to  him  before  the  levy. 

WRIGHT,  J.  We  are  aware  of  the  rule  in  equity,  that  partnership 
property  should  pay  firm  debts,  and  individual  property  individual 
debts.  But  suppose  a  judgment  is  rendered  against  persons  compos- 
ing a  firm,  in  their  individual  names,  if  individual  property  is  sold  under 
an  execution  issued  thereon,  is  the  sale  invalid,  though  there  may  be 
partnership  means?  We  think  not.  The  judgment  is  several,  the 
writ  runs  against  defendants,  as  individuals.  No  step  further  is 
necessary  in  the  first  instance  (as  by  scire  facias  or  the  like),  to  make 
individual  property  liable,  and  it  is  not  irregular  to  levy  and  sell 
that  which  the  writ  commands  the  officer  to  seize.  By  this  writ,  he 
does  not  know  of  a  joint  liability,  and  his  simple  duty,  primarily,  is, 
to  make  the  money  from  property  belonging  to  either  of  the  defend- 
ants named.  A  creditor  of  either  in  a  proper  case,  in  equity,  by  a 
showing  of  all  the  facts,  can  compel  a  resort  to  the  partnership  assets. 
But  if  this  is  not  done  the  individual  debtor  cannot  complain  of  the 
illegality  of  the  sale. 

Our  code  changes  the  common  law,  in  providing  that  a  partnership 
may  be  sued  in  its  firm  name.  If  thus  sued,  a  scire  facias  is  necessary, 

589 


SQO  LAW  AND  BUSINESS 

in  order  to  reach  individual  property.  If,  however,  a  plaintiff  follows, 
as  he  may,  the  common-law  requirement,  of  giving  the  individual 
names,  and  thus  serving  and  suing  all,  he  may  take  the  property  of 
either  partner  in  satisfaction  of  this  writ.  In  such  a  case  a  scire 
facias  is  not  necessary. 

Motion  refused. 

QUESTIONS 

1.  C  recovers  a  judgment  against  the  firm  of  Smith  and  Brown.    In  what 
different  ways  can  C  secure  satisfaction  of  the  judgment  ? 

2.  (a)  X  owes  the  firm  $500.     (b)  Y  owes  $500  to  Smith  individually.     Can 
C  reach  either  of  these  claims  in  the  satisfaction  of  his  judgment  ? 

3.  C  sues  the  firm  of  A,  B,  and  D  on  a  firm  debt  but  does  not  join  D  in  the 
action.    A  and  B  object  to  the  non-joinder.    What  decision  ? 

4.  A  and  B  do  not  object  to  the  non- joinder  of  D.     C  recovers  his  judgment 
and  causes  a  levy  to  be  made  upon  the  property  of  D.     Is  the  levy 
valid? 

5.  C  recovers  a  judgment  of  $500  on  a  firm  claim  against  A,  B,  and  D.     C 
secures  satisfaction  of  the  judgment  from  the  individual  estate  of  D. 
What  are  D's  rights  against  A  and  B  ? 

6.  The  satisfaction  of  C's  judgment  will  exhaust  the  firm  assets.     A,  who 
has  no  individual  estate,  claims  that  a  part  of  his  interest  in  the  firm 
property  is  exempt  by  virtue  of  a  statute  which  provides  that  a  debtor 
is  permitted  to  hold  $1,500  free  from  the  claims  of  his  creditors.     Is 
his  contention  valid  ? 

SANBORN  v.  ROYCE 
132  Massachusetts  Reports  594  (1882) 

Tort,  by  Charles  H.  Sanborn  and  Charles  H.  Packard,  copartners 
doing  business  under  the  firm  name  of  Sanborn  and  Packard,  for 
breaking  and  entering  the  plaintiffs'  close  in  Boston,  and  taking  and 
carrying  away  certain  articles  of  personal  property  belonging  to  them, 
with  a  count  in  tort  for  the  conversion  of  the  same.  The  defendant, 
a  constable  of  the  city  of  Boston,  justified  under  a  writ  against 
Packard,  by  virtue  of  which  he  attached  the  property  in  question. 

At  the  trial  in  the  Superior  Court,  before  PUTNAM,  J.,  it  appeared 
that  the  plaintiffs  were  copartners  in  the  grocery  and  provision 
business,  and  the  defendant  was  notified  of  this  fact  at  the  time  of  the 
attachment;  that  on  May  3,  1879,  a  creditor  of  Packard,  individually, 
sued  out  a  writ  against  him,  and  delivered  it  to  the  defendant  who 
by  virtue  of  it,  on  May  31,  1879,  attached  all  the  property  of  the 
partnership,  placed  a  keeper"  over  the  same,  and  afterward  on  the  same 


ADJUSTMENT  OF  THE  RIGHTS  OF  CREDITORS  591 

day,  by  order  of  the  plaintiffs'  attorney,  withdrew  the  keeper,  and 
removed  the  goods,  and  on  June  3,  1879,  released  the  attachment 
and  left  the  goods  where  he  found  them,  and  the  writ  against  Packard 
was  duly  entered  in  court  on  June  19,  1879,  and  is  now  pending. 

Upon  these  facts,  the  defendant  contended,  and  asked  the  judge 
to  rule,  that  he  was  justified,  by  virtue  of  said  writ,  in  what  he  did 
with  reference  to  the  property;  and  that  the  plaintiffs  could  not 
maintain  their  action.  The  judge  declined,  and  ruled  otherwise. 
The  jury  returned  a  verdict  for  the  plaintiffs;  and  the  defendant 
alleged  exceptions. 

C.  ALLEN,  J.  The  question  presented  in  this  case  has  been  several 
times  alluded  to,  but  has  never  been  decided  in  Massachusetts, 
though  it  has  been  the  subject  of  much  discussion  and  conflicting 
opinion  elsewhere.  It  has  been  declared,  that  the  real  and  actual 
interest  of  each  partner  in  the  partnership  stock  is  the  net  balance 
which  will  be  coming  to  him  after  payment  of  all  the  partnership 
debts,  and  a  just  settlement  of  the  account  between  himself  and  his 
partner.  Peck  v.  Fisher,  7  Cush.  386.  This  doctrine  is  in  accordance 
with  the  great  body  of  modern  decisions.  It  is  also  declared  in 
Allen  v.  Wells,  22  Pick.  450,  that  a  separate  creditor  can  only  take  and 
sell  the  interest  of  the  debtor  in  the  partnership  property,  being  his 
share  upon  a  division  of  the  surplus,  after  discharging  all  demands 
upon  the  partnership.  This  rule  also  is  supported  by  a  great  weight 
of  authority.  It  is  rather  remarkable,  in  view  of  the  multitude  of 
cases  in  which  the  question  has  arisen,  and  the  conflict  of  opinion 
which  has  existed,  that  the  manner  in  which  a  creditor  of  one  member 
of  a  firm  may  apply  that  member's  interest  in  the  copartnership  to 
the  payment  of  his  debt,  has  not  been  more  often  the  subject  of 
legislation.  The  rights  of  parties,  however,  in  this  state,  as  in  almost 
all  the  other  states  of  the  Union,  are  still  left  to  be  worked  out  as  well 
as  possible  by  the  courts.  There  is  an  entire  concurrence  of  opinion 
among  the  leading  text-writers,  in  recent  times,  that  courts  of  law 
cannot  adequately  deal  with  the  subject.  3  Kent,  Com.  65,  n.  Story 
Partnerships,  sees.  262,  312.  Collyer,  Partnership  (6th  ed.),  section 
793.  Lindley  sums  up  what  he  has  to  say  with  the  remark:  "The 
truth,  however,  is  that  the  whole  of  this  branch  of  the  law  is  in  a 
most  unsatisfactory  condition,  and  requires  to  be  put  on  an  entirely 
new  footing."  Lindley,  Partnerships  (4th  ed.),  section  694. 

It  is  sufficient  for  the  purposes  of  the  present  case  to  decide,  as 
we  do,  that  the  seizure  and  actual  removal  of  specific  chattels  of  a 


592  LAW  AND  BUSINESS 

partnership,  on  mesne  process  or  execution  against  one  member  thereof 
for  his  private  debt,  and  the  exclusion  of  the  firm  from  the  possession 
of  its  property,  are  a  trespass.  The  authorities  in  support  of  this 
proposition  seem  to  us  more  in  accordance  with  just  legal  principles, 
than  those  which  are  opposed  to  it.  Bank  v.  Carrollton  Railroad, 
ii  Wall.  624,  626,  629. 

Exceptions  overruled. 

QUESTIONS 

1.  C  recovers  a  judgment  against  D  who  is  a  member  of  a  partnership. 
In  what  different  ways  can  C  secure  satisfaction  of  his  judgment  ? 

2.  D  has  no  property  other  than  his  interest  in  the  partnership.    How  can 
C  reach  this  interest  in  satisfaction  of  his  judgment  ? 

3.  C  causes  an  execution  to  issue  on  the  judgment  and  sheriff  seizes  enough 
of  the  partnership  property  to  satisfy  the  judgment.     The  partnership 
sues  the  sheriff  in  trespass.     What  decision  ? 

4.  The  sheriff  levies  upon  and  takes  possession  of  all  the  partnership  prop- 
erty.    The  partnership  sues  the  sheriff  in  trespass.     What  decision  ? 

5.  Assuming  that  the  sheriff  has  made  a  valid  levy  on  the  interest  of  D  in 
the  firm,  how  does  he  proceed  to  sell  it  ?    What  is  the  effect  of  a  sale  of 
D's  interest  ?    What  does  the  purchaser  of  the  interest  get  ? 


RODGERS  v.  MERANDA 
7  Ohio  State  Reports  180  (1857) 

This  is  a  petition  in  error  to  reverse  the  judgment  of  the  common 
pleas  of  Clark  County. 

The  original  proceeding  was  a  petition  for  an  order  of  distribution 
of  the  separate  or  individual  assets  of  an  insolvent  debtor,  as  between 
separate  and  partnership  creditors. 

It  appears  from  the  record  that  about  the  thirteenth  of  June, 
1854,  Peter  Murray,  an  insolvent  debtor,  made  an  assignment  of 
all  his  estate,  real  and  personal,  to  the  plaintiff,  in  trust  for  the 
payment  of  his  individual  creditors,  in  proportion  to  the  amount  of 
their  respective  demands.  Though  possessed  of  a  large  and  valuable 
estate,  it  had  been  found  insufficient  to  pay  his  separate  debts  and 
liabilities  in  full.  At  the  date  of  his  failure  and  assignment,  he  was 
a  partner  of  John  W.  Dever,  in  a  mercantile  firm,  under  the  name  and 
style  of  Dever  &  Murray,  which  firm  had  also  become  insolvent, 
and  likewise  Dever;  and  the  firm  had  made  an  assignment  of  the 
partnership  property  and  assets,  about  the  same  time,  to  John 


ADJUSTMENT  OF  THE  RIGHTS  OF  CREDITORS  593 

Meranda,  one  of  the  defendants,  in  trust  for  the  payment  of  the  joint 
debts  or  liabilities  of  the  firm. 

In  this  condition  of  affairs,  the  partnership  creditors,  although 
they  have  filed  their  claims  with  the  assignee  of  the  firm  for  their 
distributive  shares  out  of  the  partnership  property,  claim  the  right  to 
be  admitted  to  a  participation  in  the  dividends  of  the  separate  estate 
of  Murray,  pari  passu  with  his  individual  creditors;  while  the  latter 
deny  the  right,  and  insist  that  his  separate  estate  shall  be  applied 
to  the  satisfaction  of  his  individual  debts  in  preference  to  his  partner- 
ship debts. 

It  appears  further,  that  Murray,  besides  advancing  his  part  of 
the  capital  of  the  firm,  also  loaned  money  to  the  firm  to  a  large 
amount,  for  which  he  held  the  obligations  of  the  firm;  which  obliga- 
tions, by  the  assignment  of  Murray,  came  into  the  hands  of  the 
plaintiff,  who  has  presented  the  same  to  the  assignee  of  the  firm,  and 
claims  to  have  the  same  paid  out  of  the  assets  of  the  firm,  pari  passu 
with  the  other  partnership  debts.  The  other  creditors  resist  this, 
and  plaintiff  asks  an  order  of  distribution  to  that  effect,  out  of  the 
partnership  assets. 

Defendants  demurred  to  the  petition.  The  court  below  sustained 
the  demurrer,  and  gave  judgment  in  favor  of  the  defendants.  And 
this  petition  in  error  is  filed  to  review  and  reverse  that  judgment. 

BARTLEY,  C.  J.  Two  questions  are  presented  for  determination 
in  this  case.  The  first  is,  whether  in  the  distribution  of  the  assets 
of  insolvent  partners,  where  there  are  both  individual  and  partnership 
assets,  the  individual  creditors  of  a  partner  are  entitled  to  be  first 
paid  out  of  the  individual  effects  of  their  debtor,  before  the  partnership 
creditors  are  entitled  to  any  distribution  therefrom.  It  is  well  settled 
that,  in  the  distribution  of  the  assets  of  insolvent  partners,  the  partner- 
ship creditors  are  entitled  to  a  priority  in  the  partnership  effects; 
so  that  the  partnership  debts  must  be  settled  before  any  division  of 
the  partnership  funds  can  be  made  among  the  individual  creditors  of 
the  several  partners.  This  is  incident  to  the  nature  of  partnership 
property.  It  is  the  right  of  a  partner  to  have  the  partnership  property 
applied  to  the  purposes  of  the  firm;  and  the  separate  interest  of  each 
partner  in  the  partnership  property,  is  his  share  of  the  surplus  after 
the  payment  of  the  partnership  debts.  And  this  rule,  which  gives 
the  partnership  creditors  a  preference  in  the  partnership  effects, 
would  seem  to  produce,  in  equity,  a  corresponding  and  correlative 
rule,  giving  a  preference  to  the  individual  creditors  of  a  partner  in 


594  LAW  AND  BUSINESS 

his  separate  property;  so  that  partnership  creditors  can,  in  equity, 
only  look  to  the  surplus  of.  the  separate  property  of  a  partner,  after 
the  payment  of  his  individual  debts;  and,  on  the  other  hand,  the  indi- 
vidual creditors  of  a  party  can,  in  like  manner,  only  claim  distribution 
from  the  debtor's  interest  in  the  surplus  of  the  joint  fund,  after  the 
satisfaction  of  the  partnership  creditors.  The  correctness  of  this  rule, 
however,  has  been  much  controverted;  and  there  has  not  been  always 
a  perfect  concurrence  in  the  reasons  assigned  for  it  by  those  courts 
which  have  adhered  to  it.  By  some,  it  has  been  said  to  be  an  arbitrary 
rule,  established  from  considerations  of  convenience;  by  others 
that  it  rests  on  the  basis  that  a  primary  liability  attaches  to  the  fund 
on  which  the  credit  was  given — that  in  contracts  with  a  partnership, 
credit  is  given  on  the  supposed  responsibility  of  the  firm;  while  in 
contracts  with  a  partner  as  an  individual,  reliance  is  supposed  to  be 
placed  on  his  separate  responsibility.  3  Kent,  Com.  65.  And  again, 
others  have  assigned  as  a  reason  for  the  rule,  that  the  joint  estate 
is  supposed  to  be  benefited  to  the  extent  of  every  credit  which  is  given 
to  the  firm,  and  that  the  separate  estate  is,  in  like  manner,  presumed 
to  be  enlarged  by  the  debts  contracted  by  the  individual  partner; 
and  that  there  is  consequently  a  clear  equity  in  confining  the  creditors, 
as  to  preferences,  to  each  estate  respectively,  which  has  been  thus 
benefited  by  their  transactions,  i  Har.  &  Gill.  96.  But  these  reasons 
are  not  entirely  satisfactory.  So  important  a  rule  must  have  a  better 
foundation  to  stand  upon  than  mere  considerations  of  conveniences 
and  practically  it  is  undeniable,  that  those  who  give  credit  to  a  partner- 
ship, look  to  the  individual  responsibility  of  the  partners,  as  well  as 
that  of  the  firm;  and  also,  those  who  contract  with  a  partner  in  his 
separate  capacity,  place  reliance  on  his  various  resources  or  means, 
whether  individual  or  joint.  And  inasmuch  as  individual  debts  are 
often  contracted  to  raise  means  which  are  put  into  the  business  of  a 
partnership  and  also  partnership  effects  often  withdrawn  from  the 
firm  and  appropriated  to  the  separate  use  of  the  partners,  it  cannot 
be  practically  true,  that  the  separate  estate  has  been  benefited  to  the 
extent  of  every  credit  given  to  each  individual  partner,  nor  that  the 
joint  estate  has  retained  from  the  separate  estate  of  each  partner, 
the  benefit  of  every  credit  given  to  the  firm.  Unsatisfactory  reasons 
may  weaken  confidence  in  a  rule  which  is  well  founded. 

What  then  is  the  true  foundation  of  the  rule,  which  gives  the 
individual  creditor  a  preference  over  the  partnership  creditor,  in  the 
distribution  of  the  separate  estate  of  a  partner?  To  say  that  it  is 


ADJUSTMENT  OF  THE  RIGHTS  OF  CREDITORS  595 

a  rule  of  general  equity,  as  has  been  sometimes  said,  is  not  a  satis- 
factory solution  of  the  difficulty;  for  the  very  question  is,  whether  it 
be  a  rule  of  equity  or  not.  In  the  distribution  of  the  assets  of  insol- 
vents, equality  is  equity;  and  to  say  that  the  rule  which  gives  the 
individual  creditor  a  preference  over  the  partnership  creditor  in  the 
separate  estate  of  a  partner,  is  a  rule  of  equality,  does  not  still  aid 
the  subject  of  difficulty.  For,  leaving  the  rule  to  stand,  which 
gives  the  preference  to  the  joint  creditors  in  the  partnership  property, 
and  perfect  equality  between  the  joint  and  individual  creditors,  is, 
perhaps,  rarely  attainable.  That  it  is,  however,  more  equal  and  just, 
as  a  general  rule,  than  any  other  which  can  be  devised,  consistently 
with  the  preference  to  the  partnership  creditors  in  the  joint  estate, 
cannot  be  successfully  controverted.  It  originated  as  a  consequence 
of  the  rule  of  priority  of  partnership  creditors  in  the  joint  estate, 
and  for  the  purpose  of  justice,  became  necessary  as  a  correlative 
rule.  With  what  semblance  of  equity  could  one  class  of  creditors, 
in  preference  to  the  rest,  be  exclusively  entitled  to  the  partnership 
fund,  and,  concurrently  with  the  rest,  entitled  to  the  separate  estate 
of  each  partner  ?  The  joint  creditors  are  no  more  meritorious  than 
the  separate  creditors;  and  it  frequently  happens,  that  the  separate 
debts  are  contracted  to  raise  means  to  carry  on  the  partnership 
business.  Independent  of  this  rule,  the  joint  creditors  have,  as  a 
general  thing,  a  great  advantage  over  the  separate  creditors.  Besides 
being  exclusively  entitled  to  the  partnership  fund,  they  take  their 
distributive  share  in  the  surplus  of  the  separate  estate  of  each  of  the 
several  partners,  after  the  payment  of  the  separate  creditors  of  each. 
It  is  a  rule  of  equity,  that  where  one  creditor  is  in  a  situation  to  have 
two  or  more  distinct  securities  or  funds  to  rely  on,  the  court  will  not 
allow  him,  neglecting  his  other  funds,  to  attach  himself  to  one  of  the 
funds  to  the  prejudice  of  those  who  have  a  claim  upon  that,  and  no 
other  to  depend  on.  And  besides  the  advantage,  which  the  joint 
creditors  have,  arising  from  the  fact  that  the  partnership  fund  is 
usually  much  the  largest,  as  men  in  trade,  in  a  great  majority  of  cases, 
embark  their  all,  or  the  chief  part  of  their  property,  in  it;  and  besides 
their  distributive  rights  in  the  surplus  of  the  separate  estate  of  the 
other  partners,  the  joint  creditors  have  a  degree  of  security  for  their 
debts  and  facilities  for  recovering  them,  which  the  separate  creditors 
have  not;  they  can  sell  both  the  joint  and  the  separate  estate  on  an 
execution,  while  the  separate  creditor  can  sell  only  the  separate 
property  and  the  interest  in  the  joint  effects  that  may  remain  to  the 


596  LAW  AND  BUSINESS 

partners,  after  the  accounts  of  the  debts  and  effects  of  the  firm  are 
taken,  as  between  the  firm  and  its  creditors,  and  also  as  between  the 
partners  themselves.  With  all  these  advantages  in  favor  of  partner- 
ship creditors,  it  would  be  grossly  inequitable  to  allow  them  the 
exclusive  benefit  of  the  joint  fund,  and  then  a  concurrent  right  with 
individual  creditors  to  an  equal  distribution  in  the  separate  estate  of 
each  partner.  What  equality  and  justice  is  there  in  allowing  partner- 
ship creditors,  who  have  been  paid  80  per  cent  on  their  debts,  out  of 
the  joint  fund,  to  come  in  pari  passu  with  the  individual  creditors  of 
one  of  the  partners,  whose  separate- property  will  not  payt2o  per  cent 
to  his  separate  creditors?  How  could  that  be  said  to  be  an  equal 
distribution  of  the  assets  of  insolvents  among  their  creditors  ? 

It  is  true,  that  an  occasional  case  may  arise  where  the  joint 
effects  are  proportionably  less  than  the  separate  assets  of  an  insolvent 
partner.  But,  as  a  general  thing,  a  very  decided  advantage  is  given 
to  the  partnership  creditors,  notwithstanding  this  preference  of  the 
individual  creditors  in  the  separate  property.  And  that  advantage, 
arising  out  of  the  nature  of  a  partnership  contract,  is  unavoidable. 
Some  general  rule  is  necessary;  and  that  must  rest  on  the  basis  of 
the  unalterable  preference  of  the  partnership  creditors  in  the  joint 
effects,  and  their  further  right  to  some  claim  in  the  separate  property 
of  each  of  the  several  partners.  The  preference,  therefore,  of  the 
individual  creditors  of  a  partner,  in  the  distribution  of  his  separate 
estate,  results,  as  a  principal  of  equity,  from  the  preference  of  partner- 
ship creditors  in  the  partnership  funds,  and  their  advantages  in  having 
different  funds  to  resort  to,  while  the  individual  creditors  have  but 
the  one.  It.  has  been  argued  that  partnership  contracts  are  several 
as  well  as  joint,  and  consequently  have  an  equal  legal  right  with 
separate  creditors  upon  the  individual  property  of  a  partner.  But 
the  right  of  partnership  creditors  against  the  separate  property 
of  individual  partners  in  proceedings  at  law,  is  not  in  controversy. 
The  question  here  relates  to  the  relative  equitable  rights  of  two  classes 
of  creditors  in  the  distribution  of  the  estates  of  insolvents.  Much 
of  the  confusion  upon  this  subject  has  probably  arisen  from  confound- 
ing the  abstract  rights  of  creditors  in  proceedings  at  law,  with  their 
relative  rights  to  an  equitable  adjustment  in  marshaling  the  assets 
of  insolvents  in  chancery. 

In  the  case  before  us,  however,  it  is  not  pretended  that  the  firm 
obtained  the  borrowed  money  from  Murray  improperly.  The  sepa- 
rate creditors  of  Murray,  therefore,  are  not,  on  account  of  this  claim 


ADJUSTMENT  OF  THE  RIGHTS  OF  CREDITORS  597 

for  money  lent  by  Murray  to  the  firm,  entitled  to  participate  with  the 
partnership  creditors  in  the  distribution  of  the  joint  effects. 

Judgment  of  the  common  pleas  reversed;  and  ordered  that  the 
separate  effects  of  Peter  Murray  be  distributed  pro  rata  first  among 
his  individual  creditors,  before  any  application  thereof  be  made  to 
the  payment  of  the  partnership  debts  of  Dever  &  Murray;  and  that 
the  partnership  effects  be  applied  first  to  the  payment  of  the  partner- 
ship debts,  irrespective  of  the  claim  of  the  partner,  Peter  Murray, 
for  money  loaned  by  him  to  the  firm. 

QUESTIONS 

1.  From  this  case  it  appears  that  equity  has  a  system,  entirely  different 
from  that  of  the  law,  in  distributing  the  assets  of  the  firm  and  the  assets 
of  the  members  among  the  various  claimants.     Why  should  this  be  so  ? 
How  are  the  affairs  of  the  partnership  brought  into  equity  ? 

2.  What  are  the  rights  of  firm  creditors  with  respect  to  firm  assets  in  equity  ? 
What  are  their  rights  with  respect  to  individual  assets  ? 

3.  What  are  the  rights  of  individual  creditors  with  respect  to  individual 
assets  in  equity  ?    With  respect  to  firm  assets  ? 

4.  Suppose  that  there  are  no  firm  assets  at  all,  what  are  the  rights  of  the 
firm  creditors  with  respect  to  the  individual  assets  ? 

5.  The  firm  of  Smith,  Jones,  and.  Brown  is  insolvent.    It  has  assets  amount- 
ing to  $12,500.    It  owes  C,  $5,000;  D,  $6,000;  E,  $3,500;   and  Smith, 
one  of  the  partners,  $1,000.     Smith  is  insolvent.    His  individual  assets 
amount  to  $5,000.    He  owes  X,  $1,500;  Y,  $2,500;  Z,  $3,500;  and  the 
firm,  $1,000.    Jones  has  individual  assets  amounting  to  $6,000  and  owes 
M  the  sum  of  $4,000.     Brown  has  no  individual  assets  at  all  and  owes 
P  the  sum  of  $3,000.    The  affairs  of  the  partnership  are  being  adjusted 
in  equity.    How  will  the  various  assets  be  distributed   between  the 
various  claimants  ? 

HOSPES  v.  NORTHWESTERN  MANUFACTURING  AND  CAR 

COMPANY 

48  Minnesota  Reports  174  (1892) 

MITCHELL,  J.  This  appeal  is  from  an  order  overruling  a  demurrer 
to  the  so-called  "supplemental  complaint"  of  the  Minnesota  Thresher 
Manufacturing  Co.  The  Northwestern  Manufacturing  &  Car  Co. 
was  a  manufacturing  corporation  organized  in  May,  1882.  Upon 
the  complaint  of  a  judgment  creditor  (Hospes  &  Co.),  after  return  of 
execution  unsatisfied,  judgment  was  rendered  in  May,  1884,  seques- 
trating all  its  property,  things  in  action,  and  effects,  and  appointing 


59^  LAW  AND  BUSINESS 

a  receiver  of  the  same.  This  receivership  still  continues,  the  affairs 
of  the  corporation  being  not  yet  fully  administered;  but  it  appears 
that  it  is  hopelessly  insolvent,  and  that  all  the  assets  that  have  come 
into  the  hands  of  the  receiver  will  not  be  sufficient  to  pay  any  con- 
siderable part  of  the  debts.  The  Minnesota  Thresher  Manufacturing 
Co.,  a  corporation  organized  in  November,  1884,  as  creditor  became 
a  party  to  the  sequestration  proceeding,  and  proved  its  claims  against 
the  insolvent  corporation.  In  October,  1889,  in  behalf  of  itself 
and  all  other  creditors  who  have  exhibited  their  claims,  it  filed  this 
complaint  aganst  certain  stockholders  (these  appellants)  of  the  car 
company,  in  pursuance  of  an  order  of  court  allowing  it  to  do  so,  and 
requiring  those  thus  impleaded  to  appear  and  answer  the  complaint. 
The  object  is  to  recover  from  these  stockholders  the  amount  of  cer- 
tain stock  held  by  them,  but  alleged  never  to  have  been  paid  for. 
What  was  said  in  Meagher's  case,  ante,  page  158,  50  N.W.  Rep.  1114 
(just  decided)  is  equally  applicable  here  as  to  the  right  to  enforce  such 
a  liability  in  the  sequestration  proceeding  upon  the  petition  or  com- 
plaint of  creditors  who  have  become  parties  to  it.  There  is  nothing 
in  this  practice  inconsistent  with  what  was  decided  in  Minnesota 
Thresher  Manufacturing  Co.  v.  Langdon,  44  Minn.  37  (46  N.W.  Rep. 
310).  The  complaint  is  not  the  commencement  of  an  independent 
action  by  creditors  in  their  own  behalf,  antagonistic  to  the  rights  of 
the  receiver,  but  is  filed  in  the  sequestration  proceeding  itself,  and  in 
aid  of  it.  . 

The  principal  question  in  the  case  is  whether  the  complaint  states 
facts  showing  that  the  thresher  company,  as  creditor,  is  entitled  to 
the  relief  prayed  for;  or,  in  other  words,  states  a  cause  of  action. 
Briefly  stated,  the  allegations  of  the  complaint  are  that  on  May  10, 
1882,  Seymour,  Sabin  &  Co.  owned  property  of  the  value  of  several 
million  dollars,  and  a  business  then  supposed  to  be  profitable.  That 
in  order  to  continue  and  enlarge  this  business,  the  parties  interested 
in  Seymour,  Sabin  &  Co.,  with  others,  organized  the  car  company, 
to  which  was  sold  the  greater  part  of  the  assets  of  Seymour,  Sabin  & 
Co.  at  a  valuation  of  $2,267,000,  in  payment  for  which  there  were 
issued  to  Seymour,  Sabin  &  Co.,  shares  of  the  preferred  stock  of  the 
car  company  of  the  par  value  of  $2,267,000,  it  being  then  and  there 
agreed  by  both  parties  that  this  stock  was  in  full  payment  of  the 
property  thus  purchased.  It  is  further  alleged  that  the  stockholders  of 
Seymour,  Sabin  &  Co.  and  the  other  persons  who  had  agreed  to  become 
stockholders  in  the  car  company,  were  then  desirous  of  issuing  to 


ADJUSTMENT  OF  THE  RIGHTS  OF  CREDITORS  599 

themselves,  and  obtaining  for  their  own  benefit,  a  large  amount  of 
common  stock  of  the  car  company,  "without  paying  therefor, 
and  without  incurring  any  liability  thereon  or  to  pay  therefor"; 
and  for  that  purpose,  and  "in  order  to  evade  and  set  at  naught  the 
laws  of  this  state, "  they  caused  Seymour,  Sabin  &  Co.  to  subscribe 
for  and  agree  to  take  common  stock  of  the  car  company  of  the  par 
value  of  $1,500,000.  That  Seymour,  Sabin  &  Co.  thereupon  sub- 
scribed for  that  amount  of  the  common  stock,  but  never  paid  therefor 
any  consideration  whatever,  either  in  money  or  property.  That 
thereafter  these  persons  caused  this  stock  to  be  issued  to  D.  M. 
Sabin  as  trustee,  to  be  by  him  distributed  among  them.  That  it 
was  so  distributed  without  receipt  by  him  or  the  car  company,  from 
anyone,  of  any  consideration  whatever,  but  was  given  by  the  car 
company  and  received  by  these  parties  entirely  "gratuitously." 
The  car  company  was,  at  this  time,  free  from  debt,  but  afterward 
became  indebted  to  various  persons  for  about  $3,000,000.  The 
thresher  company,  incorporated  after  the  insolvency  and  receivership 
of  the  car  company,  for  the  purpose  of  securing  possession  of  its  assets, 
property,  and  business,  and  therewith  engaging  in  and  continuing 
the  same  kind  of  manufacturing,  prior  to  October  27,  1887,  purchased 
and  became  the  owner  of  unsecured  claims  against  the  car  company, 
"bona  fide,  and  for  a  valuable  consideration, "  to  the  aggregate  amount 
of  $1,703,000.  As  creditor,  standing  on  the  purchase  of  these  debts, 
which  were  contracted  after  the  issue  of  this  "bonus"  stock,  the 
thresher  company  files  this  complaint  to  recover  the  par  value  of 
the  stock  as  never  having  been  paid  for.  The  complaint  does  not 
allege  what  the  consideration  of  these  debts  was,  nor  to  whom  origi- 
nally owing,  nor  what  the  intervener  paid  for  them,  nor  whether  any  of 
the  original  creditors  trusted  the  car  company  on  the  faith  of  the 
bonus  stock  having  been  paid  for.  Neither  does  it  allege  that  either 
the  thresher  company  or  its  assignors  were  ignorant  of  the  bonus 
issue  of  stock,  nor  that  they  or  any  of  them  were  deceived  or  damaged 
in  fact  by  such  issue,  nor  that  the  bonus  stock  was  of  any  value. 
Neither  is  there  any  traversable  allegation  of  any  actual  fraud  or 
intent  to  deceive  or  injure  creditors.  A  desire  to  get  something 
without  paying  for  it,  and  actually  getting  it,  is  not  fraudulent  or 
unlawful  if  the  donor  consents,  and  no  one  else  is  injured  by  it;  and 
the  general  allegation  that  it  was  done  "in  order  to  evade  and  set 
at  naught  the  laws  of  the  state"  of  itself  amounts  to  nothing  but  a 
mere  conclusion  of  law.  As  a  creditor's  bill,  in  the  ordinary  sense, 


6oo  LAW  AND  BUSINESS 

the  complaint  is  manifestly  insufficient.  The  thresher  company, 
however,  plants  itself  upon  the  so-called  "trust-fund"  doctrine,  that 
the  capital  stock  of  a  corporation  is  a  trust  fund  for  the  payment  of 
its  debts;  its  contention  being  that  such  a  "bonus"  issue  of  stock 
creates,  in  case  of  the  subsequent  insolvency  of  the  corporation,  a 
liability  on  part  of  the  stockholder  in  favor  of  creditors  to  pay  for 
it,  notwithstanding  his  contract  with  the  corporation  to  the  contrary. 
This  "trust-fund"  doctrine,  commonly  called  the  "American 
doctrine,"  has  given  rise  to  much  confusion  of  ideas  as  to  its  real 
meaning,  and  much  conflict  of  decision  in  its  application.  To  such 
an  extent  has  this  been  the  case  that  many  have  questioned  the 
accuracy  of  the  phrase,  as  well  as  doubted  the  necessity  or  expediency 
of  inventing  any  such  doctrine.  While  a  convenient  phrase  to 
express  a  certain  general  idea,  it  is  not  sufficiently  precise  or  accurate 
to  constitute  a  safe  foundation  upon  which  to  build  a  system  of  legal 
rules.  The  doctrine  was  invented  by  JUSTICE  STORY  in  Wood  v. 
Dummer,  3  Mason,  308,  which  called  for  no  such  invention,  the  facts 
in  that  case  being  that  a  bank  divided  up  two-thirds  of  its  capital 
among  its  stockholders  without  providing  funds  sufficient  to  pay  its 
outstanding  bill  holders.  Upon  old  and  familiar  principles  this  was 
a  fraud  on  creditors.  Evidently  all  that  the  eminent  jurist  meant 
by  the  doctrine  was  that  corporate  property  must  be  first  appropriated 
to  the  payments  of  the  debts  of  the  company  before  there  can  be  any 
distribution  of  it  among  stockholders — a  proposition  that  is  sound 
upon  the  plainest  principles  of  common  honesty.  In  Fogg  v.  Blair, 
133  U.S.  534,  541  (10  Sup.  Ct.  Rep.  338),  it  is  said  that  this  is  all 
the  doctrine  means.  The  expression  used  in  Wood  v.  Dummer  has, 
however,  been  taken  up  as  a  new  discovery,  which  furnished  a  solution 
of  every  question  on  the  subject.  The  phrase  that  "  the  capital  of  a 
corporation  constitutes  a  trust  fund  for  the  benefit  of  creditors"  is 
misleading.  Corporate  property  is  not  held  in  trust,  in  any  proper 
sense  of  the  term.  A  trust  implies  two  estates  or  interests — one 
equitable  and  one  legal;  one  person,  as  trustee,  holding  the  legal 
title,  while  another,  as  the  cestui  que  trust,  has  the  beneficial  interest. 
Absolute  control  and  power  of  disposition  are  inconsistent  with  the 
idea  of  a  trust.  The  capital  of  a  corporation  is  its  property.  It  has 
the  whole  beneficial  interest  in  it,  as  well  as  the  legal  title.  It  may 
use  the  income  and  profits  of  it,  and  sell  and  dispose  of  it,  the  same 
as  a  natural  person.  It  is  a  trustee  for  its  creditors  in  the  same  sense 
and  to  the  same  extent  as  a  natural  person,  but  no  further. 


ADJUSTMENT  OF  THE  RIGHTS  OF  CREDITORS  601 

There  is  also  much  confusion  in  regard  to  what  the  "trust  fund" 
doctrine  applies.  Some  cases  seem  to  hold  that  unpaid  subscribed 
capital  is  a  trust  fund,  while  other  assets  are  not,  that  is,  so  long  as  the 
subscription  is  unpaid  it  is  held  in  trust  by  the  corporation,  but  wherr 
once  paid  in,  it  ceases  to  be  a  trust  fund;  while  other  cases  hold  that, 
paid  or  unpaid,  it  is  all  a  trust  fund.  The  first  seems  to  be  the  rule 
laid  down  in  Sawyer  v.  Hoag,  17  Wall.  610,  in  which  the  "trust  fund" 
doctrine  was  first  squarely  announced  by  the  court  with  all  the  vigor 
and  force  characteristic  of  the  great  jurist  who  wrote  the  opinion. 
In  that  case  a  stockholder  in  an  insurance  company  had  given  his  note, 
as  the  court  found  the  fact  to  be,  for  85  per  cent  of  his  subscription  to 
the  stock  of  the  company.  After  the  company  had  become  bankrupt, 
and  the  stockholder  knew  the  fact,  he  brought  up  a  claim  against  the 
company  for  one-third  its  face,  and  in  a  suit  by  the  assignee  in  bank- 
ruptcy on  his  note  set  up  this  claim  as  an  offset.  That  this  would  have 
been  a  fraud  on  the  bankrupt  act,  or  at  least  a  moral  fraud  on  policy- 
holders,  is  quite  apparent  without  invoking  the  "trust-fund"  doc- 
trine; and,  if  the  note  for  unpaid  stock  was  a  trust  fund,  there  could 
have  been  no  offset,  whether  the  company  was  solvent  or  insolvent. 
In  the  opinion  it  is  said  that,  if  the  subscription  had  been  paid  by  the 
note  or  otherwise,  the  note  ceased  thereby  to  be  a  trust  fund  to  which 
creditors  can  look,  and  becomes  ordinary  assets,  with  which  directors 
may  deal  as  they  choose.  But  in  Upton  v.  Tribilcock,  91  U.S.  45, 
it  is  stated:  " The  capital  paid  in  and  promised  to  be  paid  in  is  a  fund 
which  the  trustees  cannot  squander  or  give  away."  While  in  Sanger 
v.  Upton,  Id.  56,  it  is  said:  "When  debts  are  incurred  a  contract 
arises  with  the  creditors  that  it  [the  capital]  shall  not  be  withdrawn 
or  applied  otherwise  than  upon  their  demands  until  such  demands 
are  satisfied."  And  in  the  same  connection  it  is  distinctly  stated 
that  there  is  no  difference  between  assets  paid  in  and  subscriptions; 
that  "unpaid  stock  is  as  much  a  part  of  this  pledge  and  as  much  a 
part  of  the  assets  of  the  company  as  the  cash  which  has  been  paid 
in  upon  it.  Creditors  have  the  same  right  to  look  to  it  as  to  any- 
thing else,  and  the  same  right  to  insist  upon  its  payment  as  upon 
the  payment  of  any  other  debt  due  to  the  company.  As  regards 
creditors,  there  is  no  distinction  between  such  a  demand  and  any 
other  asset  which  may  form  a  part  of  the  property  and  e/ects  of  the 
corporation."  This  language  is  quoted  and  approved  in  County  of 
Morgan  v.  Allen,  103  U.S.  498,  508.  It  would  seem  clear  that  this 
is  the  correct  statement  of  the  law.  The  capital  (not  the  mere 


602  LAW  AND  BUSINESS 

share  certificates)  means  all  the  assets,  however  invested.  If  a 
subscriber  gives  his  note  for  his  stock,  that  note  is  no  more  and  no 
less  a  trust  fund  than  the  money  would  have  been  if  he  had  paid  cash 
down.  Capital  cannot  change  from  a  trust  to  not  a  trust  by  a  mere 
change  of  form.  It  is  either  all  a  trust  or  all  not  a  trust,  and  the 
" trust-fund"  rule,  whatever  that  be,  must  apply  to  all  alike,  and  in 
the  same  way.  If  the  assets  of  a  corporation  are  given  back  to  stock- 
holders, the  result  is  the  same  as  if  the  shares  had  been  issued  wholly 
or  partly  as  a  bonus.  The  latter  is  merely  a  short  cut  to  the  same 
result.  So  with  dividends  paid  out  of  the  capital,  voluntary  convey- 
ances, stock  paid  in  overvalued  property,  all  are  forms  of  one  and  the 
same  thing,  all  reaching  the  same  result  (a  disposition  of  corporate 
assets),  which  may  or  may  not  be  a  fraud  on  creditors,  depending  on 
circumstances.  This  much  being  once  settled,  the  solution  of  the 
question  when  a  subsequent  creditor  can  insist  on  payment  of  stock 
issued  as  paid  up,  but  not  in  fact  paid  for,  or  not  paid  for  at  par, 
becomes  as  we  shall  presently  see,  comparatively  simple. 

Another  proposition  which  we  think  must  be  sound  is  that  credi- 
tors cannot  recover  on  the  ground  of  contract  when  the  corporation 
could  not.  Their  right  to  recover  in  such  cases  must  rest  on  the 
ground  that  the  acts  of  the  stockholders  with  reference  to  the  corporate 
capital  constitutes  a  fraud  on  their  rights.  We  have  here  a  case  where 
the  contract  between  the  corporation  and  the  takers  of  the  shares 
was  specific  that  the  shares  should  not  be  paid  for.  Therefore  unlike 
many  of  the  cases  cited,  there  is  no  ground  for  implying  a  promise  to 
pay  for  them.  The  parties  have  explicitly  agreed  that  there  shall  be 
no  such  implication,  by  agreeing  that  the  stock  shall  not  be  paid  for. 
In  such  a  case  the  creditors  undoubtedly  may  have  rights  superior  to 
the  corporation,  but  these  rights  cannot  rest  on  the  implication  that 
the  shareholder  agreed  to  do  something  directly  contrary  to  his  real 
agreement,  but  must  be  based  on  tort  or  fraud,  actual  or  presumed. 
In  England,  since  the  act  of  1877,  there  is  an  implied  contract  created 
by  statute  that  "  every  share  in  any  company  shall  be  deemed  and  be 
taken  to  have  been  issued  and  to  be  held  subject  to  the  payment  of 
the  whole  amount  thereof  in  cash."  This  statutory  contract  makes 
every  contrary  contract  void.  Such  a  statute  would  be  entirely  just 
to  all,  for  everyone  would  be  advised  of  its  provisions,  and  could 
conduct  himself  accordingly.  And  in  view  of  the  fact  that  "watered " 
and  "bonus"  stock  is  one  of  the  greatest  abuses  connected  with  the 
management  of  modern  corporations,  such  a  law  might,  on  grounds  of 


ADJUSTMENT  OF  THE  RIGHTS  OF  CREDITORS  603 

public  policy,  be  very  desirable.  But  it  is  a  matter  for  the  legislature, 
and  not  for  the  courts.  We  have  no  such  statute;  and  even  if  the 
law  of  1873,  under  which  the  car  company  was  organized,  impliedly 
forbids  the  issue  of  stock  not  paid  for,  the  result  might  be  that  such 
issue  would  be  void  as  ultra  vires,  and  might  be  canceled,  but  such  a 
prohibition  would  not  of  itself  be  sufficient  to  create  an  implied  con- 
tract, contrary  to  the  actual  one,  that  the  holder  should  pay  for  his 
stock. 

It  is  well  settled  that  an  equity  in  favor  of  a  creditor  does  not 
arise  absolutely  and  in  every  case  to  have  the  holder  of  "bonus"  stock 
pay  for  it  contrary  to  his  actual  contract  with  the  corporation.  Thus 
no  such  equity  exists  in  favor  of  one  whose  debt  was  contracted  prior 
to  the  issue,  since  he  could  not  have  trusted  the  company  upon  the 
faith  of  such  stock.  First  National  Bank  v.  Gustin,  etc.,  Mining  Co., 
42  Minn.  327  (44  N.W.  Rep.  198);  Coit  v.  Gold  Amalgamating  Co., 
119  U.S.  343  (7  Sup.  Ct.  Rep.  231);  Handley  v.  Stutz,  139  U.S.  417, 
435  (n  Sup.  Ct.  Rep.  530).  It  does  not  exist  in  favor  of  a  subsequent 
creditor  who  has  dealt  with  the  corporation  with  full  knowledge  of 
the  arrangement  by  which  the  " bonus"  stock  was  issued,  for  a  man 
cannot  be  defrauded  by  that  which  he  knows  when  he  acts.  First 
National  Bank  v.  Gustin,  etc.,  Mining  Co.,  supra.  It  has  also  been 
held  not  to  exist  where  stock  has  been  issued  and  turned  out  at  its 
full  market  value  to  pay  corporate  debts.  Clark  v.  Bever,  supra.  The 
same  has  been  held  to  be  the  case  where  an  active  corporation,  whose 
original  capital  has  been  impaired,  for  the  purpose  of  recuperating 
itself,  issues  new  stock,  and  sells  it  on  the  market  for  the  best  price 
obtainable,  but  for  less  than  par  (Handley  v.  Stutz,  supra] ;  although 
it  is  difficult  to  perceive,  in  the  absence  of  a  statute  authorizing  such 
a  thing  (of  which  everyone  dealing  with  the  corporation  is  bound  to 
take  notice),  any  difference  between  the  original  stock  of  a  new  corpora- 
tion and  additional  stock  issued  by  a  " going  concern."  It  is  difficult, 
if  not  impossible,  to  explain  or  reconcile  these  cases  upon  the  "  trust- 
fund"  doctrine,  or,  in  the  light  of  them,  to  predicate  the  liability  of 
the  stockholder  upon  that  doctrine.  But  by  putting  it  upon  the 
ground  of  fraud,  and  applying  the  old  and  familiar  rules  of  law  on  that 
subject  to  the  peculiar  nature  of  the  corporation  and  the  relation  which 
its  stockholders  bear  to  it  and  to  the  public,  we  have  at  once  rational 
and  logical  ground  on  which  to  stand.  The  capital  of  a  corporation  is 
the  basis  of  its  credit.  It  is  a  substitute  for  the  individual  liability 
of  those  who  own  its  stock.  People  deal  with  it  and  give  it  credit  on 


604  LAW  AND  BUSINESS 

the  faith  of  it.  They  have  a  right  to  assume  that  it  has  a  paid-in 
capital  to  the  amount  which  it  represents  itself  as  having;  and  if 
they  give  it  credit  on  the  faith  of  that  representation,  and  if  the  repre- 
sentation is  false,  it  is  a  fraud  upon  them;  and,  in  case  the  corporation 
becomes  insolvent,  the  law,  upon  the  plainest  principles  of  common 
justice,  says  to  the  delinquent  stockholder,  "Make  that  representa- 
tion good  by  paying  for  your  stock."  It  certainly  cannot  require  the 
invention  of  any  new  doctrine  in  order  to  enforce  so  familiar  a  rule 
of  equity.  It  is  the  misrepresentation  of  fact  in  stating  the  amount 
of  capital  to  be  greater  than  it  really  is  that  is  the  true  basis  of  the 
liability  of  the  stockholder  in  such  cases;  and  it  follows  that  it  is  only 
those  creditors  who  have  relied,  or  who  can  fairly  be  presumed  to  have 
relied,  upon  the  professed  amount  of  capital,  in  whose  favor  the  law 
will  recognize  and  enforce  an  equity  against  the  holders  of  "bonus" 
stock.  This  furnishes  a  rational  and  uniform  rule,  to  which  familiar 
principles  are  easily  applied,  and  which  frees  the  subject  from  many 
of  the  difficulties  and  apparent  .inconsistencies  in  which  the  "  trust- 
fund"  doctrine  has  involved  it;  and  we  think  that,  even  when  the 
trust-fund  doctrine  has  been  invoked,  the  decision  in  almost  every  well 
considered  case  is  readily  referable  to  such  a  rule. 

Order  reversed. 

QUESTIONS 

1.  C  recovers  a  judgment  against  the  D  Company  for  $5,000.     Against 
which  of  the  following  may  C  proceed  in  securing  satisfaction  of  his 
judgment:    (a)  Real  and  personal  property  owned  by  the  corporation? 
(b)  Franchise  to  be  a  corporation?     (c)  Franchise  to  operate  a  street 
railway  ?     (c)  Money  owed  by  X  to  the  corporation  ? 

2.  C's  execution  is  returned  unsatisfied.    He  finds  that  the  corporation  has 
transferred  a  part  of  its  assets  to  B  for  the  purpose  of  hindering,  delay- 
ing, and  defrauding  creditors.     What  are  the  rights  of  C  under  the 
circumstances  ? 

3.  The  corporation  gratuitously  issued  ten  shares  of  stock  to  S.     The 
certificate  of  stock  represented  that  the   stock  was  fully  paid   for. 
The  corporation  later  became  insolvent.     C,  a  judgment  creditor  of  the 
corporation,  having  exhausted  his  legal  remedies,  brings  a  bill  in  equity 
against  S,  asking  that  he  be  compelled  to  pay  the  corporation  the  par 
value  of  his  stock.    What  decision  ? 

4.  B,  ignorant  that  the  stock  was  gratuitously  issued  to  S,  bought  it,  paying 
therefor  half  its  par  value.    What  are  the  rights  of  C,  if  any,  against  B  ? 

5.  The  D  Company  for  several  years  conducted  a  losing  business.     The 
corporation,  having  unissued  stock,  decided  to  sell  it  below  par  value. 
S  bought  ten  shares  of  stock  under-this  issue  at  half  its  par  value.    What 
are  the  rights  of  the  corporation  against  S  ? 


ADJUSTMENT  OF  THE  RIGHTS  OF  CREDITORS  605 

GRESS  v.  KNIGHT 
135  Georgia  Reports  60  (1910) 

Proceedings  for  the  appointment  of  receivers  for  the  Bank~bf 
Way  cross.  A.  H.  Knight  and  others  were  appointed  receivers,  and 
M.  C.  Gress  and  others  intervene,  praying  for  a  rescission  of  their 
subscription  to  the  stock  of  the  bank.  Demurrers  to  the  interven- 
tions were  sustained,  and  interveners  bring  error. 

The  rescission  is  sought  on  the  ground  of  the  false  and  fraudulent 
character  of  the  representations  made  by  the  bank  and  its  agents  to 
the  interveners  to  induce  the  taking  of  the  stock.  Some  had  paid  for 
the  stock,  some  had  given  notes  therefor.  The  prayers  were  for  a 
rescission  and  other  equitable  relief.  General  and  special  demurrers 
were  filed.  They  were  sustained  and  the  interventions  dismissed; 
and  the  interveners  each  excepted. 

LUMPKIN,  J.  In  England  it  is  settled  that  after  the  commence- 
ment of  winding  up  proceedings  against  a  corporation  an  applica- 
tion to  be  relieved  from  liability  as  a  shareholder  on  the  ground  of 
fraud  practiced  upon  him  by  agents  of  the  company  in  procuring  the 
subscription  comes  too  late.  Oakes  v.  Turquand,  L.R.  2  H.L.  325; 
Stone  v.  City  &°  County  Bank,  3  C.P.  Div.  282.  By  the  companies 
act  of  1862  (Statutes  at  Large;  25  &  26  Viet.  434,  sees.  23,  26,  37, 
38)  every  company  was  required  to  keep  a  register  of  members  or 
shareholders,  showing  the  name  and  address  of  each,  and  the  date  of 
becoming  a  member  and  ceasing  to  be  a  member,  and  a  penalty  was 
provided  for  a  failure  to  do  so.  Once  a  year  a  list  was  required  to  be 
made  up  and  forwarded  to  the  public  registrar.  The  register  of 
members  was  made  prima  facie  evidence  of  what  it  was  required  to 
contain.  On  winding  up,  every  present  and  past  member  who  had 
not  ceased  to  be  a  member  for  a  year  was  liable  to  contribute  to  the 
payment  of  debts.  How  far  the  English  decisions  may  have  been 
affected  by  the  requirements  of  that  act  need  not  be  considered. 

In  this  state  there  is  no  similar  law.  The  courts  must  determine 
the  question  by  applying  general  principles  of  equity.  A  stockholder 
occupies  a  threefold  relation:  First,  to  the  corporation  itself;  second, 
to  other  stockholders;  and,  third,  to  creditors  of  the  corporation. 
Fraud  does  not  render  a  contract  absolutely  void,  but  voidable.  It 
remains  valid  until  repudiated  or  avoided.  As  between  a  stockholder 
and  the  corporation,  unless  special  circumstances  alter  the  case,  the 
general  rule  that  contracts  obtain  by  fraud  may  be  avoided  by  the 


6o6  LAW  AND  BUSINESS 

party  defrauded  applies  to  a  stock  subscription  induced  by  the  fraud 
of  the  company  through  its  authorized  agents.  So  also  where  only 
the  rights  of  other  shareholders  are  affected;  the  company  being 
solvent  and  a  " going  concern."  These  matters  are  of  comparatively 
easy  solution.  But,  where  the  rights  of  creditors  are  involved,  the 
question  is  one  of  greater  difficulty. 

Some  American  decisions  have  announced  in  general  terms  the 
rule  laid  down  by  the  English  courts;  but  in  most  of  them  additional 
circumstances  existed,  such  as  receiving  benefits  after  knowledge, 
or  notice  of  the  fraud,  acts  done  after  notice  or  knowledge,  incon- 
sistent with  a  disaffirmance,  laches,  estoppel,  the  intervening  of  rights 
of  innocent  third  parties,  or  the  like.  Thus  in  Chubb  v.  Upton,  95 
U.S.  665,  667  (24  L.  Ed.  523),  Mr.  JUSTICE  HUNT  said:  "It  has  been 
several  times  adjudged  in  this  court  that  in  an  action  by  such  assignee 
to  recover  unpaid  subscriptions  upon  stock  in  such  an  organization  the 
defense  of  false  and  fraudulent  representations  inducing  such  sub- 
scription cannot  be  set  up,  especially  when  the  subscriber  has  not 
been  vigilant  in  discovering  such  fraud,  and  in  repudiating  his 
contract." 

It  cannot  be  easily  determined  just  how  far  a  rule  laid  down  in 
general  terms  would  be  applied  in  the  absence  of  the  facts  added  to 
it  under  an  "especially."  In  the  case  just  cited  Chubb  was  sued  by 
an  assignee  in  bankruptcy  of  the  company.  He  sought  to  set  up 
irregularities  and  informalities  in  the  increase  of  capital  stock  to 
which  he  became  a  subscriber,  and  also  fraud  in  the  procurement  of 
his  subscription.  It  appeared  that  he  was  president  of  a  branch  of 
the  company,  took  part  in  its  meetings,  paid  money  on  his  stock,  and 
at  one  time  gave  a  proxy  to  another  person  to  attend  and  vote  at  a 
stockholders'  meeting  at  the  main  office.  He  made  no  effort  to  cancel 
his  subscription.  The  company  incurred  liabilities,  and  was  adjudi- 
cated a  bankrupt  about  fifteen  months  after  his  subscription.  Clearly 
he  should  not  have  been  relieved. 

In  Upton  v.  Tribilcock,  91  U.S.  45,  23  L.  Ed.  203,  the  shareholder 
had  delayed  repudiating  his  subscription  for  three  years  and  until 
an  assignee  in  bankruptcy  had  been  appointed,  and  there  were  other 
circumstances  showing  laches.  Discussions  of  the  subject  will  be 
found  in  2  Thompson  on  Corporations,  sections  1440,  1449;  Upton  v. 
Englehartj  3  Dill.  496,  Fed.  Cas.  No.  16,  800;  Farrar  v.  Walker,  3 
Dill.  506,  Fed.  Cas.  No.  4679;  Newton  National  Bank  v.  Newbegin, 
74  Fed.  135,  20  C.C.A.  339,  33  L.R.A.  727,  and  note;  Parker  v. 


ADJUSTMENT  OF  THE  RIGHTS  OF  CREDITORS  607 

Thomas  (Ind.)  81  Am.  Dec.  385,  401,  note.  A  number  of  American 
decisions  are  to  the  effect  that  where  one  subscribes  to  stock  and  the 
company  proceeds  to  do  business,  incurs  liabilities  and  later  fails  and 
is  adjudged  a  bankrupt,  or  its  assets  are  placed  in  the  hands  of  a 
receiver  for  the  purpose  of  winding  it  up,  no  rescission  will  be  allowed, 
unless  under  exceptional  circumstances.  Thompson,  Corporations, 
section  1450. 

When  a  person  becomes  a  stockholder  of  a  corporation,  he  becomes 
a  part  of  it.  Its  agents  are  in  a  sense  his  agents.  They  go  out  and 
deal  with  the  public.  If  through  their  dealings  debts  are  incurred, 
assuming  both  the  stockholder  and  the  creditor  to  be  innocent  and 
that  one  must  suffer,  the  former,  who  put  it  in  the  power  of  the  agents 
to  do  the  wrong,  should  suffer  rather  than  third  parties  who  dealt  with 
such  agents.  Civ.  Code,  1895,  section  3940.  As  to  creditors  whose 
claims  arose  after  the  stockholders  became  such,  their  rights  are 
superior  to  any  right  of  rescission.  The  status  of  a  stockholder 
relative  to  creditors  who  became  such  after  he  took  the  stock  is  not 
in  all  respects  identical  with  that  relative  to  antecedent  creditors. 
As  to  creditors  whose  debts  were  created  before  he  took  the  stock, 
questions  of  laches,  acts  inconsistent  with  rescission,  estoppel,  etc., 
might  arise.  The  new  stockholders  may  have  permitted  the  increase 
of  indebtedness  and  the  lessening  of  the  assets  with  which  to  pay. 

It  does  not  affirmatively  appear  in  this  case  whether  debts  were 
created  after  the  interveners  became  stockholders,  or  their  amount. 
There  was  originally  an  allegation  in  each  intervention  on  informa- 
tion and  belief  that  all  the  creditors  were  the  same  as  those  existing 
before  the  stock  was  issued ;  but  this  was  stricken  out  by  amendment. 
We  do  not  think  that  it  can  be  said  as  matter  of  law  that  such  laches 
or  conduct  on  the  part  of  the  interveners  affirmatively  appears  on  the 
face  of  the  respective  interventions  so  as  to  authorize  us  to  declare  that 
no  rescission  could  be  had,  whatever  may  be  developed  by  the  evi- 
dence. It  was  error  to  sustain  the  general  demurrers.  If  the  inter- 
ventions were  not  otherwise  demurrable,  they  did  not  become  so  by 
reason  of  failing  to  negative  the  existence  of  any  debts  incurred  after 
they  took  their  stock.  That  was  matter  of  defense  to  the  intervention 
under  the  facts  alleged. 

Most  of  the  special  demurrers  were  not  meritorious.  These  were 
not  original  suits,  but  interventions  in  the  main  suit,  where  the 
assets,  books,  and  memoranda  were  in  the  hands  of  the  receivers. 
The  special  demurrers,  if  they  were  all  sustained,  would  have  required 


608  LAW  AND  BUSINESS 

the  attaching  to  each  intervention  of  a  large  part  of  the  items  from 
such  books,  in  order  to  show  insolvency,  or  that  the  representations 
that  there  were  no  overdrafts  and  that  there  was  a  large  surplus,  etc., 
were  false.  We  do  not  think  this  was  necessary.  When  the  facts 
are  shown,  it  can  be  made  to  appear  whether  a  fraud  was  really  per- 
petrated on  each  of  the  inter veners,  whether  there  was  any  lack  of 
diligence  in  discovering  such  fraud  or  unreasonable  delay  in  seeking 
relief  after  its  discovery,  whether  there  was  any  active  participation 
by  the  interveners  in  the  management  of  the  corporation,  or  whether 
debts  had  been  incurred  after  the  intervener  became  a  stockholder, 
which  either  gave  corporate  creditors  superior  equitable  rights  or 
estopped  the  intervener  from  denying  that  he  was  a  stockholder, 
and  generally  whether  his  conduct  was  such  as  to  prevent  relief. 

Judgment  reversed. 
QUESTIONS 

1.  When  a  stockholder  has  been  induced  by  fraud  to  subscribe  for  stock  in 
a  corporation,  why  should  there  be  any  doubt  about  his  right  to  rescind 
the  subscription  ? 

2.  S  subscribed  for  stock  in  a  corporation  to  be  organized  with  power  to 
conduct  a  realty  investment  business.    The  corporation  carried  the 
business  on  for  a  while  and  became  insolvent.     C,  a  judgment  creditor 
of  the  corporation,  is  proceeding  against  S  to  collect  his  unpaid  subscrip- 
tion.    S  contends  that  he  cannot  be  held  because  the  corporation  did 
not  sufficiently  comply  with  the  law  to  become  a  de  jure  corporation. 
What  decision  ? 

3.  S  subscribed  for  stock  on  condition  that  the  corporation  should  locate 
its  principal  office  in  the  city  of  X.     C  is  proceeding  against  S  to  collect 
his  unpaid  subscription.     S  contends  that  he  is  not  liable  because  the 
corporation  did  not  locate  its  principal  office  in  X.     What  decision  ? 

4.  C  is  proceeding  against  S  on  his  unpaid  stock  subscription.     S  asks  that 
he  be  allowed  a  set-off  against  the  claim  in  respect  to  a  sum  of  money 
owed  by  the  corporation  to  him.    What  decision  ? 

5.  In  defense  to  the  proceedings  of  C,  S  sets  up  the  statue  of  limitations 
as  a  defense.    What  decision  ? 

TAYLOR  v.  FANNING 
87  Minnesota  Reports  53  (1902) 

COLLINS,  J.  The  plaintiff  in  this  case  was  also  plaintiff  in  Taylor 
v.  Mitchell,  80  Minn.  492,  82  N.W.  418.  Five  of  the  defendants  in 
that  case  are  the  same  as  in  this.  The  facts  do  not  differ  particularly, 
except  that  the  lien  on  corporate  real  property  was  there  secured  by 


ADJUSTMENT  OF  THE  RIGHTS  OF  CREDITORS  609 

means  of  a  mortgage,  while  here  a  lien  upon  the  same  property  was 
secured  through  a  judgment.  The  defendant  corporation  was 
insolvent  prior  to  May  30,  1895,  and  thereafter  continued  to  be. 
These  defendants  were  six  of  the  seven  persons  constituting  its  board 
of  directors,  and,  claiming  that  the  corporation  was  indebted  to  them 
on  account  of  their  previous  payment  of  certain  of  its  debts,  a  resolu- 
tion was  adopted  by  the  board  November  30  of  that  year  directing 
the  execution  and  delivery  of  two  corporate  notes,  each  for  the  sum 
of  $1,000,  and  payable  to  the  order  of  these  gentlemen.  In  pursu- 
ance of  this  resolution  the  notes  now  under  consideration  were  exe- 
cuted and  delivered  by  the  defendant  Mitchell,  as  president  of  the 
corporation,  and  by  Director  Batcheller,  as  its  secretary,  on  the 
same  day. 

All  of  this  time  the  indebtedness  of  the  corporation  was  largely 
in  excess  of  the  limit  prescribed,  and,  of  course,  this  was  known  to 
the  directors.  It  is  insisted  by  plaintiff's  counsel  that  it  was  not 
shown  at  the  trial  that  the  original  indebtedness  for  which  the 
notes  were  given  was  that  of  the  corporation,  but,  for  the  purposes  of 
this  case,  we  assume  that  it  was.  The  notes  became  due  on  March  i, 
1896.  A  month  later  the  payees  indorsed  and  transferred  the 
same  to  one  Fanning  solely  for  the  purpose  of  having  him  begin 
suit,  and  to  secure  a  judgment  thereon.  April  18  a  summons  and 
complaint  in  said  action  were  personally  served  upon  Johnson,  one 
of  these  defendants,  a  director  of  the  corporation  and  a  payee  of  the 
notes,  and  also  upon  the  secretary,  who,  as  before  stated,  had  no 
personal  interest  in  the  obligations.  The  complaint  was  filed  in  the 
office  of  the  clerk  of  court  on  the  same  date,  and  thereafter  remained. 
May  29,  1896,  judgment  was  entered  in  favor  of  Fanning  against  the 
corporation  by  default,  and  it  became  a  first  lien  upon  real  property 
when  final  judgment  was  entered  in  the  other  case,  setting  aside  the 
mortgage.  December  30,  1896,  an  action  was  brought  against  the 
corporation  under  the  provisions  of  G.  S.  1894,  c.  76,  and  this  plain- 
tiff was  thereupon  appointed  receiver.  The  present  action,  to  set 
aside  the  Fanning  judgment,  was  instituted  in  August,  1900.  The 
court  below  found  for  the  defendants,  and  this  appeal  is  from  a 
judgment  in  their  favor  thereupon  entered. 

Testing  this  case  by  the  rule  laid  down  in  Taylor  v.  Mitchell, 
supra,  it  would  seem  that  the  court  below  was  in  error.  It  was  there 
held  that  the  directors  of  an  insolvent  corporation,  being  its  creditors, 
cannot  take  advantage  "  of  their  fiduciary  relation,  and  deal  directly 


6 10  LAW  AND  BUSINESS 

with  themselves,  to  the  injury  of  others  in  equal  right.  If  they  do, 
equity  will  set  aside  the  transaction,  at  the  suit  of  creditors  of  the 
corporation  or  their  representatives,  without  reference  to  the  question 
of  any  actual  fraudulent  intent  upon  the  part  of  the  directors;  for  the 
right  of  the  creditors  does  not  depend  upon  fraud  in  fact,  but  upon  the 
violation  of  the  fiduciary  relation  of  the  directors."  The  validity  of 
such  a  transaction  does  not  depend  upon  the  presence  of  an  actual 
fraudulent  intent,  but  the  pertinent  and  controlling  inquiry  is,  has 
there  been  a  violation  of  the  duty  which  the  directors  owed  to  all 
creditors  of  the  corporation,  and  a  disregard  of  the  rule  that  directors 
cannot  take  advantage  of  their  relationship  to  the  corporation,  and 
secure  to  themselves  an  advantage  or  preference  over  other  creditors  ? 
Admitting  that  the  transaction  was  legitimate  up  to  the  time  the 
notes  were  transferred  to  Fanning  and  the  action  was  brought,  the 
corporation  was  then  insolvent,  and  ought  not  to  have  transacted 
any  other  business — facts  well  known  by  the  directors.  Its  indebted- 
ness had  for  a  long  time  exceeded  its  charter  limit  by  about  50  per 
cent,  and  this  the  directors  also  well  knew.  That  they  transferred 
the  notes  to  Fanning,  a  stranger  to  the  transaction  and  to  the  corpora- 
tion, may  be  only  suggestive  of  a  purpose,  for  some  improper  reason, 
to  avoid  being  known  in  the  action;  but  certain  it  is  that  these 
directors,  trustees  for  all  of  the  creditors,  knew  that,  if  their  claim 
could  become  a  first  judgment,  the  lien  of  the  same  would  be  subject 
to  the  mortgage  only,  and  would  operate  to  destroy  the  value  of  the 
property  to  other  creditors,  in  violation  of  their  duty  to  preserve  it 
for  the  equal  benefit  of  all  to  whom  the  insolvent  was  indebted.  It 
may  be  true  that  by  executing  and  delivering  the  notes  the  then 
existing  indebtedness  of  the  company  was  not  increased,  but  that  does 
not  dispose  of  the  fact  that  by  causing  an  action  to  be  brought,  and 
securing  a  judgment,  which  became  a  lien  upon  the  corporate  property, 
they  were  appropriating  it  for  their  own  exclusive  benefit,  and  to  the 
direct  injury  of  those  who,  upon  every  principle  of  justice,  had  equal 
rights  with  themselves.  That  the  judgment  through  which  they 
obtained  this  preference  was  not  hastily  obtained,  but,  on  the  con- 
trary, that  each  step  was  taken  with  what  may  be  called  deliberate 
slowness,  does  not  relieve  the  defendants  of  the  charge  that  through 
this  proceeding  they  have  not  acted  in  good  faith,  and  that  proper 
scrutiny  of  the  transaction  leads  to  the  conclusion  that  their  course 
was  indefensible,  unless  we  are  to  absolve  directors  of  a  corporation 
from  the  observance  of  good  faith  toward  its  creditors.  These 


ADJUSTMENT  OF  THE  RIGHTS  OF  CREDITORS  6n 

directors  have  disregarded  the  governing  principle  in  such  cases, 
which  is  that  the  directors  and  manager  of  insolvent  corporations 
are  trustees  of  all  the  property,  are  bound  to  apply  the  same  pro  rata 
for  the  payments  of  debts,  and  cannot  use  it  to  exonerate  themselves 
to  the  injury  of  other  creditors. 

Looking  at  the  transaction  in  the  most  favorable  light  for  defend- 
ants, the  fact  is  apparent  that,  while  occupying  a  relationship  as  to  all 
creditors  which  demanded  of  them  the  utmost  good  faith,  they  caused 
this  action  to  be  brought,  and  countenanced  and  aided  in  the  entry  of 
a  judgment  which  operated  directly  to  secure  the  payment  of  their 
own  debt  in  preference  to  debts  of  other  creditors,  when,  as  a  matter 
of  law,  they  were  bound  and  should  have  taken  steps  to  apply  all  of 
the  assets  of  the  corporation  to  the  payment  of  all  debts,  pro  rata  and 
equally.  Had  they  assumed  to  secure  their  own  indebtedness  by 
means  of  a  mortgage  executed  and  delivered  upon  the  day  judgment 
was  entered,  the  transaction  would  have  been  set  aside  without  the 
slightest  hesitation,  as  was  the  mortgage  involved  in  the  former 
action,  and  for  the  same  reasons.  There  is  no  real  distinction  between 
a  transaction  in  which  there  is  a  direct  conveyance  of  corporate 
property  to  creditors,  and  one  by  means  of  which  the  property  may 
be  appropriated  to  the  payment  of  the  same  debt  by  means  of  legal 
proceedings.  One  is  a  friendly  conveyance;  the  other  is  hostile,  at 
least,  in  form;  but  this  cannot  be  of  importance. 

The  judgment  is  reversed,  and  the  case  remanded  for  proceedings 
in  accordance  with  the  views  expressed  above. 

QUESTIONS 

1.  The  D  Company  borrowed  $5,000  from  S,  one  of  its  stockholders,  and 
gave  him  a  mortgage  on  corporate  property  to  secure  the  debt.    Later 
on   the  corporation  became  insolvent.     Creditors  of  the  corporation 
bring  proceedings  to  have  the  mortgage  set  aside.     What  decision  ? 

2.  In  the  foregoing  case,  the  corporation  was  insolvent  when  it  gave  the 
mortgage  to  S.     What  decision  ? 

3.  The  corporation  borrowed  $5,000  from  D,  one  of  its  directors  and  gave 
him  a  mortgage  to  secure  the  debt.     Later  on  the  corporation  became 
insolvent.     Creditors  of  the  corporation  bring  proceedings  to  have  the 
mortgage  set  aside.    What  decision  ? 

4.  In  the  foregoing  case,  the  corporation  was  insolvent  when  the  mortgage 
was  given.     What  decision  ? 

5.  In  Question  2,  it  appears  that  S  held  a  majority  of  the  stock  of  the 
corporation  and  controlled  the  directors  of  the  corporation.     What 
decision  ? 


6i2  LAW  AND  BUSINESS  ' 

HELLER  v.  THE  NATIONAL  MARINE  BANK 

89  Maryland  Reports  602  (1899) 

Appeal  from  a  decree  of  the  circuit  court  of  Baltimore  City 
(WiCKES,  J.)  by  which  it  was  adjudged  that  the  holders  of  the 
preferred  stock  of  the  Chesapeake  Guano  Co.  have  a  lien  upon 
the  property  of  the  corporation,  including  the  moneys  collected  by  the 
receivers,  and  are  entitled  to  priority  over  creditors  of  the  corporation 
whose  debts  were  contracted  subsequently  to  the  time  when  said 
stock  was  issued. 

MCSHERRY,  C.  J.  The  contention  in  this  case  is  between  the 
holders  of  what  is  called  preferred  stock  and  creditors  of  an  insolvent 
corporation. 

The  stockholders  of  the  Chesapeake  Guano  Co.,  a  corporation 
formed  under  the  general  corporation  laws  of  this  state,  voted  some 
years  ago  to  increase  the  company's  capital  by  the  issue  of  sixty 
thousand  dollars  of  preferred  stock.  Without  pausing  at  this  point 
to  examine  whether  the  method  pursued  was  the  proper  one  or  not, 
it  suffices  for  the  present  to  say  that  the  authorized  shares  were  all 
taken.  Subsequently  the  company  contracted  debts  due  to  unsecured 
creditors  and  thereafter  became  insolvent,  and  its  property  and 
assets  were  placed  in  the  hands  of  receivers. 

If  this  stock  is  preferred  stock,  pure  and  simple,  the  contention  of 
the  creditors  is  right.  The  law  is  perfectly  well  settled  that  as 
between  creditors  and  ordinary  preferred  stockholders,  the  latter, 
as  owners  of  the  property  of  an  insolvent  corporation,  are,  upon  a 
distribution  of  its  assets,  entitled  to  nothing  until  its  creditors  are 
first  fully  paid.  There  is  a  palpable  difference  between  the  relation 
of  a  stockholder  and  a  creditor  to  the  corporate  property.  Stock, 
whether  preferred  or  common,  is  capital;  and  generally  speaking, 
a  certificate  of  stock  merely  evidences  the  amount  whith  the  holder 
has  contributed  to  or  ventured  in  the  enterprise.  Such  a  certificate, 
representing  nothing  more  than  the  extent  of  his  ownership  in 
the  capital,  cannot  well  be  treated  as  indicating  that  he  is,  by 
virtue  of  it  alone,  also  to  the  same  extent  a  creditor  who  may  com- 
pete with  other  creditors  in  the  distribution  of  the  fund  arising 
from  a  conversion  of  the  corporation's  assets  into  money.  He 
cannot,  if  he  is  simply  an  ordinary  preferred  stockholder,  in  the  nature 
of  things,  so  far  as  third  persons  are  concerned,  be  at  one  and  the  same 
time  and  by  force  of  the  same  certificate,  both  part-owner  of  the 


ADJUSTMENT  OF  THE  RIGHTS  OF  CREDITORS  613 

property  and  creditor  of  the  company  for  that  portion  of  its  capital 
which  stands  in  his  name.  His  certificate,  therefore,  in  such  cir- 
cumstances, merely  measures  the  quantum  of  his  ownership.  As  his 
chance  of  gain  throws  on  the  stockholder,  as  respects  creditors,  the 
entire  risk  of  the  loss  of  his  contribution  to  the  capital,  it  is  a  fixed 
characteristic  of  capital  stock  that  no  part  of  it  can  be  withdrawn  for 
the  purpose  of  repaying  the  principal  of  the  capital  until  the  debts  of 
the  corporation  are  satisfied.  Warren  v.  King,  108  U.S.  389;  Cook 
on  Stock,  etc.,  section  271 ;  Hamlin  v.  Toledo,  St.  L.  6s  K.  Railroad  Co., 
47  U.S.  App.  422;  S.C.,  36  L.R.A.  826.  Whether  this  character- 
istic may  be  modified  by  statute  may  be  considered  later  on.  To  be 
strictly  accurate,  we  ought  to  say  there  is  a  sense  in  which  a  share- 
holder is  a  creditor.  In  that  sense  every  corporation  includes  its 
capital  stock  among  its  liabilities,  but  it  is  a  liability  which  is  post- 
poned to  every  other  liability.  And  as  to  the  matured  and  unpaid 
guaranteed  dividends  due  on  preferred  stock,  the  relation  of  creditor 
undoubtedly  exists.  Baltimore  &  Ohio  Railroad  v.  State,  36  Md.  541. 

But,  after  all,  is  this  particular  stock,  technically  speaking, 
ordinary  preferred  stock,  and  subject  consequently  to  the  legal 
incidents  and  characteristics  of  that  species  of  property  ? 

If  you  call  it  preferred  stock,  and  it  is  what  you  call  it,  then  the 
law  is  perfectly  clear  that  it  has  no  priority  over  the  contesting 
creditors.  If  you  call  it  preferred  stock,  and  it  is  not  preferred  stock, 
then,  obviously,  it  is  not  governed  by  the  principles  applicable  to 
preferred  stock,  but  by  those  relating  to  the  thing  that  it  really  is. 
The  mere  naming  of  it  does  not  make  it  that  which  it  is  named,  if,  in 
fact,  it  is  something  else.  Its  properties  and  qualities  determine 
what  it  is.  If  the  statute  calls  it  what  its  properties  and  qualities 
show  that  it  is  not,  surely  it  does  not  thereby  become  what  it  is 
misnamed,  and  cease  to  be  what  it  essentially  is.  Calling  stock 
preferred  stock  does  not  per  se  define  the  rights  in  such  stock,  but  these 
depend  on  the  statute  or  contract  under  which  it  is  issued.  Elkins 
v.  Cam.  &  A.  R.  Co.,  36  NJ.  Eq.  233.  As  said  by  the  supreme  court 
of  Ohio: 

To  call  a  thing  a  wrong  name  does  not  change  its  nature.  A  mortgage 
creditor,  although  denominated  a  preferred  stockholder,  is  a  mortgage 
creditor  nevertheless,  and  interest  is  not  changed  into  a  dividend  by  call- 
ing it  a  dividend.  Nothing  is  more  common  in  the  construction  of  statutes 
and  contracts  than  for  the  court  to  correct  such  self-evident  misnomers  by 
supplying  the  proper  words.  To  use  the  language  of  the  court  in  Corcoran  v. 


6 14  LAW  AND  BUSINESS 

Powers,  6  Ohio  St.  19,  "The  question  in  such  cases  is,  not  what  did  the 
parties  call  it,  but  what  do  the  facts  and  circumstances  require  the  court 
to  call  it?"  Burt  v.  Rattle,  31  Ohio  St.  115. 

Courts  are  not  influenced  by  mere  names.  They  look  beyond  these 
and  give  to  the  subject  dealt  with  the  character — the  status — which 
its  properties  denote  it  possesses.  The  qualities  and  properties  of 
a  thing  are  its  essentials,  they  define  and  mark  what  it  is — the  name 
is  purely  accidental — it  is  no  part  of  the  thing  named.  If,  then,  the 
thing  which  the  statute  contemplates,  possesses  the  characteristics 
and  qualities  of  preferred  stock — and  possesses  none  other — it  is 
preferred  stock;  but  if,  on  the  other  hand,  it  possesses  characteristics 
and  qualities  that  are  entirely  foreign  to  preferred  stock  as  strictly 
defined,  and  that  are  descriptive  of  something  else,  then  the  thing 
is  obviously  either  not  ordinary  preferred  stock,  or  not  preferred 
stock  at  all,  even  though  it  be  called  preferred  stock,  and  have  in 
addition  to  its  own  qualities  some  of  the  characteristics  that  do 
pertain  to  preferred  stock.  Precisely  because  preferred  stock  has  no 
lien  on  the  company's  property  and  cannot  be  repaid  in  advance  of 
general  creditors,  it  is  necessarily  true  that  a  security  which  is,  by 
express  and  emphatic  legislative  enactment,  entitled  to  just  such  a 
lien  and  just  such  priority,  is  not  preferred  stock  technically  speak- 
ing, though  called  by  that  name  and  though  having  many  features 
incident  to  preferred  stock.  The  whole  ingenious  and  exceedingly 
able  argument  for  the  appellants  proceeded  upon  the  assumption 
that  this  is  ordinary  preferred  stock,  because  called  preferred  stock, 
and  because  it  possesses  the  incidents  of  such  stock  (but  it  ignored 
the  fact  that  it  has  a  quality  which  preferred  stock  has  not),  and 
the  conclusion  thence  deduced  was,  that  being  that  kind  of  stock 
it  has  no  preferential  lien.  Now,  the  converse  is  exactly  true.  If 
the  statute  plainly  gives  a  lien  and  a  preference,  then  this  so-called 
preferred  stock  is  not  ordinary  preferred  stock  at  all,  no  matter  what 
it  is  called  and  no  matter  what  incidents  it  may  have  in  common 
with  preferred  stock,  and,  therefore,  it  has  not  that  particular  char- 
acteristic which,  if  it  were  ordinary  preferred  stock,  would  defer  it 
to  the  claims  of  unsecured  creditors.  Brushing  aside  the  name,  let 
us  see  what  are  the  essential  qualities  of  this  statutory  creation. 

The  Act  of  1868,  chapter  471,  section  219,  authorized  corporations 
to  issue  preferred  stock.  It  was  an  alternative  method  of  obtaining 
money.  Any  corporation  which,  under  its  charter,  had  authority 
to  borrow  money  and  issue  bonds  therefor,  and  secure  the  payment  of 


ADJUSTMENT  OF  THE  RIGHTS  OF  CREDITORS  615 

the  bonds  by  mortgage,  might,  instead  of  resorting  to  that  method, 
issue  preferred  stock.  In  issuing  it  the  companies  were  empowered 
to  execute  an  agreement  guaranteeing  to  the  purchasers  of,  or  sub- 
scribers to,  such  preferred  stock,  a  perpetual  dividend  of  6  per  cent 
out  of  the  profits  of  the  corporation  before  any  dividend  could  be  paid 
to  the  holders  of  the  common  stock.  The  holders  of  such  preferred 
stock  were  given  all  the  incidents,  rights,  privileges,  and  immunities, 
and  made  subject  to  all  the  liabilities  to  which  the  holders  of  common 
stock  were  entitled  or  subject.  This  was  strictly  and  technically 
ordinary  preferred  stock.  It  had  no  priority  over  creditors  or  over 
subsequent  mortgages  or  incumbrances,  and  it  had  no  lien  on  the 
franchises  or  the  property  of  the  corporation.  It  merely  guaranteed 
a  dividend  of  6  per  cent  out  of  the  profits — that  is  the  net  profits — 
and  if  there  were  no  profits  there  would  be  no  dividend.  Its  priority 
was  simply  a  priority  over  the  usual  rights  and  interest  of  another, 
but  subordinate,  class  of  stockholders.  That  is  the  kind  of  preferred 
stock  authorized  by  the  Act  of  1868,  as  a  mere  glance  at  its  provi- 
sions— quoted  in  the  beginning  of  this  opinion,  omitting  the  lines  in 
italics — will  demonstrate.  In  the  language  of  the  supreme  court 
Warren  v.  King,  supra,  "it  would  be  difficult  to  say  that  these  statu- 
tory provisions  allowed  any  preference  in  shares  of  capital  stock, 
except  a  preference  among  classes  of  shares,  or  any  preference  of  any 
class  over  creditors.  There  is  nothing  in  the  certificate  that  clothes 
them  with  a  single  attribute  of  a  creditor."  The  stock  authorized 
by  the  Act  of  1868  was  not  only  preferred  stock,  but  it  had  every 
incident  of  stock,  and  none  that  was  not.  For  twelve  years  the 
statute  remained  unchanged.  Shares  issued  under  it  were,  as  we 
have  said,  essentially  shares  of  capital  with  none  of  the  qualities  of  an 
evidence  of  debt,  and  shareholders  were  simply  owners  of  the  capital, 
with  none  of  the  rights  of  creditors  of  the  company.  But  in  1880 
the  statute  was  amended  by  the  addition  of  the  words  in  italics. 
By  the  provision  requiring  the  agreement  to  be  recorded  no  change 
was  effected  in  the  relation  of  the  preferred  to  the  common  share- 
holder— the  former  was  given  no  greater  right  over  the  latter  than  he 
had  before  the  agreement  was  required  to  be  recorded — and  the  rela- 
tion of  the  preferred  shareholder  to  the  company's  subsequent  credi- 
tors was  not  disturbed  unless  the  last  clause,  giving  the  shareholder 
a  lien  and  declaring  a  preference  in  his  favor,  altered  the  nature  of 
the  preferred  stock  and  made  it  something  that  it  had  not  been  under 
the  Act  of  1868.  If  the  clause  giving  the  shareholder  a  lien  and  a 


616  LAW  AND  BUSINESS 

priority  did  not  create  a  new  species  of  preferred  stock,  or  a  security 
differing  radically  from  ordinary  preferred  stock,  it  is  difficult,  if  not 
impossible  to  assign  any  reason  for  the  adoption  of  the  Act  of  1880. 
The  clause  specifically  declaring  that  "the  said  preferred  stock  shall 
be  and  constitute  a  lien  on  the  franchises  and  property  of  such  corpora- 
tion, and  have  priority  over  any  subsequently  created  mortgage  or 
other  incumbrance,"  essentially  changed  the  whole  nature  of  the  thing 
antecedently  described  as  preferred  stock,  and  the  statutory  lien  con- 
verted it  into  something  wholly  different.  The  statute  says  "said 
preferred  stock" — not  the  guaranteed  dividend  thereon — shall  be 
and  constitute  a  lien  on  the  property  and  franchises  of  the  company. 
If  you  say  the  lien  only  extends  to  the  dividend,  then  you  say  the 
stock  shall  not  be  a  lien,  though  the  legislature  said  it  should  be. 

Preferred  stock  under  the  Act  of  1868  had  no  lien  whatever;  this 
statutory  preferred  stock,  under  the  Act  of  1880 — "The  said  preferred 
stock" — has  a  lien  on  franchises  and  on  property.  Preferred  stock 
under  the  Act  of  1868  had  no  priority  over  creditors;  this  statutory 
preferred  stock  under  the  Act  of  1880  has  priority  over  subsequent 
mortgages  and  incumbrances.  The  two  are  therefore  intrinsically 
different,  and  the  argument  that  gives  to  the  latter  no  greater  effect 
or  wider  range  than  the  former  possessed,  simply  because  of  the 
identity  of  the  name  applied  to  both,  must  totally  ignore  and  in  fact 
expunge  the  clause  of  the  statute  expressly  creating  the  lien.  If 
this  statutory  preferred  stock  has  a  lien,  then  it  differs  from  ordinary 
preferred  stock  in  that  it  has  the  lien.  If,  because  it  is  called  pre- 
ferred stock,  it  has  no  lien,  though  the  statute  says  it  shall  have, 
then  the  name  controls  the  substance,  and  the  lien  expressly  given 
is  simultaneously  taken  away  by  the  name  conferred.  Either  the 
name  or  the  substance  must  yield  and  certainly  the  latter  cannot  be 
made  subordinate  to  the  former. 

Giving  to  the  holder  of  what  the  Act  of  1880  designates  preferred 
stock  a  lien  is  not  without  precedent.  It  can  be  done  and  the  ulti- 
mate question  always  is,  has  it  been  done  ?  That  it  can  be  done  a 
few  citations  will  show.  In  Elliott  on  Railroads,  section  85,  the 
general  rule  is  thus  stated :  "  Unless  a  preference  in  payment  of  capital 
invested  has  been  specially  contracted  for  [Re  Bangor,  etc.,  6°  Co., 
L.R.  20,  Eq.  59;  Re  Bridge-water  Navigation  Co.,  L.R.  39  Ch.  Div.  i] 
or  is  given  by  statute  [McGregor  v.  Home  Insurance  Co.,  33  NJ.  Eq. 
181],  the  holder  of  the  preferred  stock  shares  equally  with  the  common 
shareholders  in  a  distribution  of  assets  upon  dissolution.  This  results 


ADJUSTMENT  OF  THE  RIGHTS  OF  CREDITORS  617 

from  the  rule  that  he  is  a  stockholder  and  not  a  creditor."  "But 
much,"  the  same  author  proceeds  to  observe  in  section  86,  "will 
necessarily  depend  upon  the  language  used,  and  where  the  interest  is 
guaranteed  absolutely  and  the  corporation  also  agrees  to  liquidate 
the  principal  at  a  specified  time,  or  the  like,  so  that  the  so-called  stock 
is  in  reality  an  interest-bearing  debenture,  the  relation  created  thereby 
will  be  that  of  debtor  and  creditor,  and  the  holder  will  not  be  merely 
a  stockholder  as  he  would  be  if  it  were  preferred  or  interest-bearing 
stock  payable  only  out  of  the  profits  [Burt  v.  Rattle,  31  Ohio  St.  116; 
West  Chester  Railroad  v.  Jackson,  77  Pa.  St.  321;  Totten  v.  Tison, 
54  Ga.  139].  Its  validity,  therefore,  would  depend  upon  some  other 
power  than  the  power  to  issue  preferred  stock."  And  in  Cook  on 
Stock,  etc.,  section  271,  it  is  said:  "A  mortgage  to  secure  preferred 
stock  and  dividends  thereon  has  been  upheld  in  a  few  cases.  In 
other  cases  that  which  was  called  preferred  stock  was  nothing  more 
than  income  bonds  with  a  voting  power."  In  the  case  of  Garrett  et 
al.  v.  May  et  al.,  19  Md.  191,  the  late  Mr.  Reverdy  Johnson,  in  his 
argument,  spoke  of  the  "income  bonds,"  which  were  there  the  sub- 
ject of  controversy,  as  equivalent  to  preferred  stock.  As  the  interest 
and  principal  of  the  bonds  were  payable  out  of  income,  it  meant  net 
income.  "The  holder,"  he  said,  "is  thus  made  only  a  preferred 
stockholder,"  "Occasionally,  however,"  remarks  Mr.  Cook,  section 
271,  Stock,  etc.,  "a  mortgage  is  given  by  the  corporation  to  secure  the 
payment  of  dividends  on  preferred  stock  and  to  give  it  a  preference  in 
payment  over  subsequent  debts  of  the  corporation  upon  insolvency  or 
dissolution.  It  is  difficult  to  see  how  such  a  mortgage  could  be 
legal  except  when  it  is  issued  under  express  statutory  authority." 
In  West  Chester  Railroad  v.  Jackson,  supra,  it  is  said  by  Judge  Wood- 
ward, speaking  for  the  court,  "A  corporation  may  issue  new  shares 
and  give  them  a  preference  as  a  mode  of  borrowing  money,  where 
it  has  power  to  borrow  on  bond  and  mortgage,  as  preferred  stock  is 
only  a  form  of  mortgage."  In  S kiddy  v.  Atlantic  Railroad,  3  Hughes, 
355 >  it  was  held  that  where  preferred  stock  had  been  issued,  reciting 
that  the  stipulated  interest  was  a  lien  on  all  the  property  of  the 
corporation  after  the  first  mortgage,  the  lien  would  be  upheld  by  the 
court  as  against  subsequent  mortgages  and  general  creditors,  though 
such  lien  had  not  been  secured  by  any  mortgage. 

There  ought,  then,  to  be  no  doubt  that  this  method  of  creating 
a  lien  in  favor  of  a  stockholder  can  be  resorted  to,  if  the  legislature 
see  fit  to  authorize  it.  That  it  has  authorized  it  by  the  terms  of  the 


6i8  LAW  AND  BUSINESS 

Act  of  1880,  hereinbefore  transcribed  and  put  in  italics,  is,  it  seems  to 
us,  perfectly  clear.  The  General  Assembly  has,  in  plain  and  unmis- 
takable words,  declared  that  this  particular  kind  of  stock — the  "said 
preferred  stock" — shall  be  and  constitute  a  lien  on  the  company's 
property.  No  language  could  be  more  explicit;  and,  most  certainly, 
courts  have  no  authority  to  reject  or  to  disregard  it.  Stock  issued 
under  this  Act  is  consequently  a  lien  on  the  property  of  the  company 
issuing  it,  and  entitled  to  the  preference  which  the  statute  gives  it. 

It  is  no  answer  to  say  that  the  giving  of  such  a  lien  is  nugatory 
by  reason  of  a  lien  being  inconsistent  with  the  properties  and  qualities 
of  stock;  because  it  is  quite  obvious  that  after  a  lapse  of  twelve  years 
the  legislature,  by  adopting  the  Act  of  1880,  intended  to  do  just  what 
it  did  do,  even  though  in  doing  it  the  nature  of  the  thing  dealt  with 
was  changed  and  a  new  and  entirely  different  statutory  preferred 
stock  was  created.  That  it  had  the  power  to  do  this  cannot  be 
disputed.  There  was  neither  physical  nor  legal  impossibility  in  the 
way;  and  no  principle  of  sound  and  enlightened  public  policy  was 
invaded.  The  substance  of  the  thing  was  changed,  the  name  was 
retained. 

From  what  has  been  said  it  results  that,  in  our  opinion,  the 
so-called  preferred  stock  is  a  lien  on  the  company's  franchises  and 
property  owned  at  the  time  the  stock  was  issued. 

QUESTIONS 

1 .  What  functions  does  preferred  stock  in  a  corporation  perform  ?    In  terms 
of  its  functions,  should  it  not  be  given  a  preference  over  the  general 
creditors  of  the  corporation  in  the  distribution  of  the  corporate  assets  ? 

2.  Can  the  stockholders  by  the  adoption  of  a  by-law  give  a  preference  to 
holders  of  preferred  stock  over  the  general  creditors  of  the  corporation  ? 

3.  A  statute  provides  that  a  corporation  may  issue  a  certain  amount  of 
preferred  stock  and  that  the  preferred  stock  shall  have  a  lien  upon  the 
corporate  property  and  shall  have  priority  over  any  subsequently  created 
debt.     Comment  on  the  validity  and  purpose  of  such  a  statute. 


CHAPTER  VIII 

DISSOLUTION  OF  THE  BUSINESS  UNIT 

SOLOMON  v.  KIRKWOOD 
55  Michigan  Reports  256  (1884) 

COOLEY,  C.  J.  The  evidence  given  on  the  trial  tends  to  show 
that  on  July  6,  1882,  Hollander  &  Kirkwood  entered  into  a  written 
agreement  for  a  partnership  for  one  year  from  the  first  day  of  the 
next  ensuing  month,  in  the  business  of  buying  and  selling  jewelry, 
clocks,  watches,  etc.,  and  in  repairing  clocks,  watches,  and  jewelry, 
at  Ishpeming,  Michigan.  Business  was  begun  under  this  agreement, 
and  continued  until  the  latter  part  of  October,  1882,  when  Kirkwood, 
becoming  dissatisfied,  locked  up  the  goods  and  excluded  Hollander 
altogether  from  the  business.  He  also  caused  notice  to  be  given  to 
all  persons  with  whom  the  firm  had  had  dealings  that  the  partnership 
was  dissolved,  and  had  the  following  inserted  in  the  local  column  of 
the  paper  published  at  Ishpeming:  "The  copartnership  heretofore 
existing  between  Mr.  C.  H.  Kirkwood  and  one  Hollander,  as  jewelers, 
has  ceased  to  exist,  Mr.  Kirkwood  having  purchased  the  interest  of 
the  latter."  This  was  not  signed  by  anyone. 

A  few  days  later  Hollander  went  to  Chicago,  and  there,  on  No- 
vember 9,  1882,  he  bought,  in  the  name  of  Hollander  &  Kirkwood,  of 
the  plaintiffs,  goods  in  their  line  amounting  to  $791.92,  and  gave  to  the 
plaintiffs  therefor  the  promissory  note  now  in  suit.  The  note  was 
made  payable  December  15,  1882,  at  a  bank  in  Ishpeming.  When 
the  purchase  was  completed  Hollander  took  away  the  goods  in  his 
satchel.  The  plaintiffs  had  before  had  no  dealings  with  Hollander  & 
Kirkwood,  but  they  had  heard  there  was  such  a  firm,  and  were  not 
aware  of  its  dissolution.  They  claim  to  have  made  the  sale  in  good 
faith,  and  in  the  belief  that  the  firm  was  still  in  existence.  On  the 
other  hand,  Kirkwood  claimed  that  Hollander  and  the  plaintiffs 
had  conspired  together  to  defraud  him  by  a  pretended  sale  to  the 
firm  of  goods  which  the  plaintiffs  knew  Hollander  intended  to  appro- 
priate exclusively  to  himself;  and  he  was  allowed  to  prove  declara- 
tions of  Hollander  which,  if  admissible,  would  tend  strongly  to.  prove 
such  a  conspiracy. 

619 


620  LAW  AND  BUSINESS 

The  questions  principally  contested  on  the  trial  were:  first, 
whether  the  acts  of  Kirkwood  amounted  to  a  dissolution  of  the  part- 
nership; second,  whether  sufficient  notice  of  dissolution  was  given; 
and  third,  whether  there  was  any  evidence  to  go  to  the  jury  of  an 
understanding  between  Hollander  and  the  plaintiffs  to  defraud 
Kirkwood.  The  trial  judge,  in  submitting  the  case  to  the  jury, 
instructed  them  that  Kirkwood,  notwithstanding  the  written  agree- 
ment, had  a  right  to  withdraw  from  the  partnership  at  any  time, 
leaving  matters  between  him  and  Hollander  to  be  adjusted  between 
them  amicably  or  in  the  courts;  and  for  the  purposes  of  this  case  it 
made  no  difference  whether  Kirkwood  was  right  or  wrong  in  bringing 
the  partnership  to  an  end;  if  wrong,  he  might  be  liable  to  Hollander 
in  damages  for  the  breach  of  his  contract.  Also,  that  when  partners 
are  dissatisfied,  or  they  cannot  get  along  together,  and  one  partner 
withdraws,  the  partnership  is  then  at  an  end  as  to  the  public  and 
parties  with  whom  the  partnership  deals,  and  neither  partner  can 
make  contracts  in  the  future  to  bind  the  partnership,  provided  the 
retiring  partner  gives  the  proper  notice.  Also,  that  if  they  should 
find  from  the  evidence  that  there  was  trouble  between  Hollander  and 
Kirkwood  prior  to  the  sale  of  the  goods  and  the  giving  of  the  note; 
that  Kirkwood  informed  Hollander,  in  substance,  that  he  would  have 
no  more  dealings  with  him  as  a  partner;  that  he  took  possession  of 
all  the  goods  and  locked  them  up,  and  from  that  time  they  ceased 
to  do  business — then  the  partnership  was  dissolved.  Further,  that 
whether  sufficient  notice  had  been  given  of  the  dissolution  was  a 
question  for  the  jury.  Kirkwood  was  not  bound  to  publish  notice 
in  any  of  the  Chicago  papers;  he  was  only  bound  to  give  actual 
notice  to  such  parties  there  as  had  dealt  with  the  partnership.  But 
Kirkwood  was  bound  to  use  all  fair  means  to  publish  as  widely  as 
possible  the  fact  of  a  dissolution.  Publication  in  a  newspaper  is 
one  of  the  proper  means  of  giving  notice,  but  it  is  not  absolutely 
essential ;  and  on  this  branch  of  the  case  the  question  for  the  jury  was 
whether  Kirkwood  gave  such  notice  of  the  dissolution  as  under  the 
circumstances  was  fair  and  reasonable.  If  he  did,  then  he  is  not 
liable  on  the  note;  if  he  did  not,  he  would  still  continue  liable. 

The  judge  also  submitted  to  the  jury  the  question  of  fraud  in  the 
sale  of  the  goods.  The  jury  returned  a  verdict  for  the  defendants. 

i.  We  think  the  judge  committed  no  error  in  his  instructions 
respecting  the  dissolution  of  the  partnership.  The  rule  on  this  subject 
is  thus  stated  in  an  early  New  York  case.  The  right  of  a  partner  to 


DISSOLUTION  OF  THE  BUSINESS  UNIT  621 

dissolve,  it  is  said,  "is  a  right  inseparately  incident  to  every  partner- 
ship. There  can  be  no  such  thing  as  an  indissoluble  partnership. 
Every  partner  has  an  indefeasible  right  to  dissolve  the  partnership 
as  to  all  future  contracts  by  publishing  his  own  volition  to  that 
effect;  and  after  such  publication  the  other  members  of  the  firm 
have  no  capacity  to  bind  him  by  any  contract.  Even  where  partners 
covenant  with  each  other  that  the  partnership  shall  continue  seven 
years,  either  partner  may  dissolve  it  the  next  day  by  proclaiming  his 
determination  for  that  purpose;  the  only  consequence  being,  that  he 
thereby  subjects  himself  to  a  claim  for  damages  for  a  breach  of  his 
covenant.  The  power  given  by  one  partner  to  another  to  make  joint 
contracts  for  them  both,  is  not  only  a  revocable  power,  but  a  man  can 
do  no  act  to  divest  himself  of  the  capacity  to  revoke  it."  Skinner  v. 
Dayton,  19  Johns.  513,  538.  To  the  same  effect  are  Mason  v.  Connell, 
i  Whart.  381  and  Slemmer's  Appeal,  58  Penn.  St.  155.  There  may  be 
cases  in  which  equity  would  enjoin  a  dissolution  for  a  time,  when  the 
circumstances  are  such  as  to  make  it  especially  injurious;  but  no 
question  of  equitable  restraint  arises  here.  When  one  partner 
becomes  dissatisfied  there  is  commonly  no  legal  policy  to  be  sub- 
served by  compelling  a  continuance  of  the  relation,  and  the  fact  that 
a  contract  will  be  broken  by  the  dissolution  is  no  argument  against 
the  right  to  dissolve.  Most  contracts  may  be  broken  at  pleasure, 
subject,  however,  to  responsibility  in  damages.  And  that  respon- 
sibility would  exist  in  breaking  a  contract  of  partnership  as  in  other 
cases. 

2.  The  instruction  respecting  notice  was  also  correct.  No  court 
can  determine  for  all  cases  what  shall  be  sufficient  notice  and  what 
shall  not  be;  the  question  must  necessarily  be  one  of  fact.  Publica- 
tion of  notice  of  dissolution  in  a  local  newspaper  is  common,  but  it 
is  not  the  only  method  in  which  notice  can  be  given.  The  purpose 
of  the  notice  is  to  make  notorious  in  the  local  community  the  fact  that 
a  dissolution  has  taken  place;  and  publication  of  a  notice  may  or  may 
not  be  the  most  effectual  means  for  that  purpose.  Very  few  persons 
in  any  community  probably  read  all  the  advertisements  published 
in  the  local  papers;  and  matters  of  local  importance  which  are  adver- 
tised are  quite  as  likely  to  come  to  them  from  other  sources  as  from 
the  published  notices. 

That  publication  in  a  newspaper  is  sufficient  is  not  disputed  by 
the  defense,  provided  it  appears  on  its  face  to  be  authoritative. 
Ketcham  v.  Clark,  6  Johns.  144;  s.c.  5A  Dec.  197;  Graves  v.  Merry, 


622  LAW  AND  BUSINESS 

6  Cow.  701;  s.c.  16  Am.  Dec.  471;  National  Bank  v.  Norton,  i  Hill 
578;  Nott  v.  Douming,  6  La.  680;  s.c.  26  Am.  Dec.  491;  Watkinson  v. 
#<m&  o/  Pennsylvania,  4  Whart.  482;  s.c.  34  Am.  Dec.  521;  Rose  v. 
Cojffield,  53  Md.  18;  s.c.  36  Am.  Rep.  389.  But  in  this  case  it  is  said 
the  notice  did  not  appear  to  be  authoritative;  it  appeared  as  a  local 
editorial  item,  and  such  items  are  often  baseless,  and  may  in  any 
particular  case  have  no  better  foundation  than  rumor  or  even  suspi- 
cion. They  do  not  bear  upon  their  face  the  verity  which  a  notice 
signed  by  the  party  would  import. 

All  this  may  be  true  without  being  conclusive.  When  the  purpose 
is  to  put  the  fact  of  dissolution  before  the  public,  it  certainly  cannot 
be  affirmed  that  the  purpose  is  more  likely  to  be  accomplished  by  a 
formal  advertisement  than  by  an  item  in  the  local  column  of  the  news- 
paper. Many  publishers,  it  is  believed,  have  in  their  papers  a  local 
column  in  which  items  appear  which  seem  on  their  face  to  be  editorial, 
but  which  are  really  advertisements;  and  not  only  paid  for,  but  paid 
at  extra  rates,  for  the  reason  that  in  that  column  they  would  be  more 
likely  to  be  seen  and  read  than  if  published  as  advertisements  in  the 
ordinary  way.  When  such  is  the  case,  a  court  could  hardly  hold  as 
matter  of  law  that  the  advertisement  would  be  sufficient,  but  the 
notice  in  the  local  column  not.  To  do  so  would  be  to  make  form 
more  important  than  the  purpose  to  be  accomplished.  One  who 
derives  knowledge  of  the  fact  from  public  notoriety  is  sufficiently 
notified.  Bernard  v.  Torrance,  5  Gill.  &  J.  383 ;  Halliday  v.  McDougall, 
20  Wend.  81.  And  probably  in  many  small  communities  a  fact  would 
sooner  be  made  notorious  by  a  notice  in  the  local  column  of  the 
county  or  village  paper  than  in  any  other  way.  In  a  large  city  it 
might  be  otherwise.  But  all  that  can  be  required  in  any  case  is  that 
such  notice  be  given  as  is  likely  to  make  the  fact  generally  known 
locally.  Vernon  v.  Manhattan  Co.,  22  Wend.  183,  193;  Lovejoy  v. 
Spa/ord,  93  U.S.  430.  When  that  is  done  the  party  giving  the  notice 
has  performed  his  duty,  and  anyone  contemplating  for  the  first  time 
to  open  dealings  with  the  partnership  must  at  his  peril  ascertain  the 
facts.  This,  in  effect,  was  the  instruction  given. 

3.  But  we  think  the  judge  erred  in  receiving  evidence  of  Hol- 
lander's admissions  or  declarations  tending  to  show  fraudulent  collu- 
sion between  him  and  the  plaintiffs.  The  declarations  of  a  conspirator 
may  be  evidence  against  his  associates  after  the  conspiracy  is  made 
out;  but  to  receive  them  as  proof  of  the  conspiracy  would  put  every 
man  at  the  mercy  of  rogues.  We  find  in  this  case  no  evidence  of  the 


DISSOLUTION  OF  THE  BUSINESS  UNIT  623 

conspiracy  except  in  the  statements  of  Hollander;  and  those  having 
been  erroneously  received  there  was  nothing  on  that  branch  of  the 
case  to  submit  to  the  jury. 

For  this  error  there  must  be  a  new  trial. 

QUESTIONS 

1.  It  is  said  that  a  partnership  relation  may  be  terminated  at  any  time 
by  a  mutual  agreement  of  the  partners.     What  is  meant  by  this  ?    How 
is  such  termination  effected  ? 

2.  A  and  B  enter  into  a  partnership  to  engage  in  the  milling  business. 
Nothing  is  said  in  their  contract  as  to  the  duration  of  the  relation. 
A  wishes  to  dissolve  the  relation,  B  wishes  to  continue  it.     How  can  A 
withdraw  without  incurring  liability  to  B  for  damages  ? 

3.  A  and  B  agree  that  the  relation  shall  be  continued  for  one  year.     A, 
before  the  end  of  the  year,  gives  notice  to  B  of  his  intention  to  withdraw 
from  the  firm  and  later  withdraws.     B   sues  A  for  damages.    What 
decision  ? 

4.  A,  before  the  expiration  of  the  year,  sells  his  interest  in  the  business  to 
C.     B  sues  A  for  damages.    What  decision  ? 

5.  What  is  the  effect  of  the  following  events  on  the  continuance  of  the  rela- 
tion?    (a)   A  dies,     (b)   A  becomes  insolvent,     (c)   A  is  declared  a 
bankrupt. 

6.  What  is  the  purpose  of  giving  notice  of  dissolution  of  a  firm?    In  what 
cases  of  dissolution  must  notice  be  given  ?    To  whom  must  notice  be 
given  ?    What  kind  of  notice  is  necessary  ?    Who  should  give  the  notice  ? 

ASKEW  v.  SILMAN 
95  Georgia  Reports  678  (1894) 

SIMMONS,  C.  J.  Mrs.  Silman  sued  Askew  and  others,  alleged  to 
be  members  of  the  firm  of  Austin  &  Co.,  upon  a  promissory  note 
signed  in  the  firm  name  and  dated  June  17,  1890.  Askew  pleaded  not 
indebted;  also,  that  he  had  not  signed  the  note  nor  authorized  any 
person  to  do  so  for  him,  and  had  never  ratified  the  signing;  and 
further,  that  he  was  not  a  member  of  the  firm  when  the  note  was 
signed  and  was  not  bound  by  the  contract,  that  the  firm  was  dissolved 
January  n,  1888,  and  had  ceased  to  do  business  from  that  date,  which 
fact  was  known  to  the  plaintiff  when  the  note  was  executed.  There 
was  a  verdict  for  the  plaintiff  against  all  the  defendants  sued;  and 
Askew  made  a  motion  for  a  new  trial,  which  was  overruled,  and  he 
excepted. 

The  main  question  at  issue  on  the  trial  of  the  case  was  whether 
there  was  such  notice  of  the  dissolution  of  the  partnership  as  would 


624  LAW  AND  BUSINESS 

relieve  Askew  from  liability  for  the  debt  in  question.  It  appeared 
from  the  evidence  that  the  dissolution  took  place,  as  alleged  in  the 
plea,  more  than  two  years  prior  to  the  date  of  the  note,  and  that  the 
note  was  given  by  Austin,  one  of  the  copartners,  without  the  knowl- 
edge or  consent  of  Askew,  for  money  borrowed  by  Austin  in  the  name 
of  the  firm  at  the  time  the  note  was  executed.  Askew's  withdrawal 
from  the  partnership  was  announced  soon  after  the  dissolution  in  a 
newspaper  published  in  the  town  in  which  the  plaintiff  resided  and 
the  firm  conducted  its  business,  the  announcement  appearing  at 
different  times,  in  the  form  of  news  items  written  by  the  editor  of  the 
paper.  The  plaintiff  was  a  subscriber  to  the  newspaper  when  these 
notices  appeared,  but  testified  that  she  did  not  see  them  and  that  she 
had  no  notice  or  knowledge  of  the  dissolution  at  any  time  prior  to 
the  execution  of  the  note,  but  supposed  when  she  took  the  note  that 
Askew  was  still  a  member  of  the  firm.  She  had  been  a  customer  of 
the  firm,  as  a  purchaser  of  goods,  during  Askew's  connection  with  it, 
but  was  not  a  creditor  before  the  date  of  the  note.  The  court,  in 
certain  instructions  to  the  jury  which  are  complained  of  by  the  plain- 
tiff in  error,  charged  them,  in  effect,  that  if  the  plaintiff  was  a  "cus- 
tomer" of  the  firm,  she  would  be  entitled  to  actual  notice  of  the 
dissolution.  We  think  the  court  erred  in  so  charging.  In  order  to 
relieve  an  ostensible  partner  from  liability  for  debts  contracted  in  the 
partnership  name  subsequently  to  his  withdrawal  from  the  firm,  the 
dissolution  must  be  made  known  "to  creditors  and  to  the  world" 
(Code,  section  1895),  but  it  is  not  necessary  that  the  notice  should  be 
actual  or  personal  except  to  creditors.  Although  it  is  often  said  in 
textbooks  and  decisions  that  actual  notice  or  knowledge  of  the  dis- 
solution must  be  brought  home  to  former  "customers"  of  the  firm,  this 
language  has  reference  only  to  creditors.  (See  Bates  on  Partnership, 
section  613;  17  Am.  6*  Eng.  Enc.,  1124.)  A  customer  in  the  sense 
in  which  the  term  was  used  in  this  case — that  is  to  say,  one  whose 
dealings  with  the  partnership  have  been  confined  to  the  purchase  of 
its  goods,  is  entitled  only  to  such  notice  as  should  be  given  to  "the 
world." 

Judgment  reversed. 
QUESTIONS 

i.  This  was  an  action  by  the  P  Bank  on  a  note,  purporting  to  be  the  note 
of  Smith  and  Brown,  trading  partners,  executed  by  Brown  and  dis- 
counted by  the  bank.  Smith  proved,  in  defense,  that  previous  to 
the  execution  of  the  note  the  partnership  relation  between  Brown  and 
himself  had  been  terminated  by  mutual  assent;  and  that  notice  of  such 


DISSOLUTION  OF  THE  BUSINESS  UNIT  625 

termination  had  been  published  in  a  local  newspaper.  The  bank  proved 
that  it  had  advanced  money  to  the  firm  on  several  occasions  and  that 
it  had  never  seen  the  notice  in  the  paper.  What  decision  ? 

2.  P  on  several  occasions  sold  goods  to  the,  firm  of  Smith  and  Brown  but 
always  for  cash.     P  is  suing  the  firm  for  goods  sold  to  Brown  on  firm 
credit  after  the  dissolution  of  the  partnership.     P  proves  that,  although 
living  in  the  same  town,  he  had  not  seen  the  notice  of  dissolution.     What 
decision  ? 

3.  B  is  suing  Smith  and  Brown  for  money  advanced  to  Brown  on  firm 
credit  without  knowledge  of  the  dissolution  of  the  firm.     Smith  proves 
that  B,  although  knowing  of  the  existence  of  the  partnership,  had  never 
done  business  with  it  previous  to  its  dissolution.     What  decision  ? 

4.  C  is  suing  the  firm  for  goods  sold  to  Brown  on  firm  credit  without  notice 
of  the  dissolution  of  the  firm.     Smith  proves  that  C  not  only  had  never 
traded  with  the  firm  before  but  never  knew,  until  after  its  dissolution, 
that  such  a  firm  had  ever  existed.     What  decision  ? 

SHEA  v.  DONAHUE 
15  Lea's  Tennessee  Reports  160  (1885) 

Bill  for  partnership  accounting  between  Shea  and  Donahue. 
They  became  partners  under  written  agreement  for  one  year  "as 
merchants  in  making,  buying,  and  selling  all  kinds  of  tinware,  stoves, 
pumps,  etc."  "And  to  constitute  a  fund  for  the  purpose  Timothy 
Shea  has  paid  in  as  stock  one  thousand  dollars,  which  will  constitute 
a  common  stock,  to  be  used  and  employed  between  us  in  buying 
goods,  wares,  and  merchandise.  John  Donahue  being  a  practical 
workman  and  having  considerable  experience  in  the  above-named 
business,  it  is  agreed  that  he  will  give  the  business  his  entire  personal 
attention  and  the  benefit  of  his  experience  to  place  against  the  cash 
furnished  by  said  Shea.  We  are  to  bear  the  expenses  and  losses 
jointly  and  share  the  profits  equally.  The  capital  stock  is  not  to  be 
withdrawn  by  either  party  until  the  end  of  the  term,  but  to  be 
employed  as  capital  unless  otherwise  mutually  agreed  between  us  in 
writing."  The  business  was  in  fact  carried  on  for  about  three  years. 
Upon  the  settlement,  Donahue  claimed  to  be  entitled  to  one-half  of 
the  capital  advanced  by  Shea.  The  chancellor  decided  against  Dona- 
hue, and  he  appealed. 

COOPER,  J.  The  contention  of  the  defendant  is  that  by  the  terms 
of  the  agreement  he  was  entitled  at  the  end  of  one  year  to  an  equal 
share  of  the  profits  of  the  business,  and  to  one-half  of  the  capital 
advanced  by  his  partner,  and  this,  although  it  goes  without  saying 
he  would  retain  all  his  practical  experience  which  was  to  be  placed 


626  LAW  AND  BUSINESS 

against  the  cash  furnished  by  his  partner.  But  the  agreement  is 
that  the  partners  are  only  to  " share  the  profits  equally,"  not  the 
profits  and  the  capital.  And  the  profits  of  any  business  are  only 
what  remains  after  deducting  debts  and  expenses,  and  the  capital 
paid  in.  Lindley  on  Partnership,  pages  791,  806.  The  provision  that 
the  capital  stock  shall  constitute  a  common  stock  to  be  used  in  buying 
the  materials  and  wares  of  their  trade,  merely  designates  the  mode 
in  which  it  is  agreed  that  the  capital  shall  be  invested.  And  the 
further  provision  that  the  capital  stock  shall  not  be  withdrawn  by 
either  party  until  the  end  of  the  term  was  only  intended  to  restrain 
the  partners  from  drawing  funds  from  the  business  so  as  to  trench 
upon  the  capital  while  the  partnership  continued.  There  is  nothing 
in  the  articles  of  agreement  to  take  the  case  out  of  the  ordinary  one 
of  a  partnership  in  profit  and  loss  upon  unequal  capitals. 

•  Of  course  the  articles  of  a  partnership  may  expressly  provide  for 
an  equal  division  of  the  assets,  upon  a  dissolution,  notwithstanding 
an  unequal  advance  of  capital  by  the  respective  partners.  The  same 
result  may  follow  a  continuous  course  of  dealing  upon  a  basis  which 
implies  such  equal  division.  For  if  there  is  no  evidence  from  which 
any  different  conclusion  as  to  what  was  agreed  can  be  drawn,  the 
shares  of  all  the  partners  will  be  adjudged  equal,  upon  the  favorite 
maxim  of  chancery  that  equality  is  equity.  But,  as  Mr.  Lindley 
tells  us,  the  rule  is  when  the  partners  have  advanced  unequal  capitals, 
and  have  agreed  to  share  profits  and  losses  equally,  without  more, 
that  each  partner  is  entitled  to  his  advance  before  division,  and  a 
deficiency  in  the  capital  must  be  treated  like  any  other  loss,  and 
borne  equally  by  the  partners.  Lindley  on  Partnership,  page  807. 

The  only  authorities  adduced  by  the  learned  counsel  of  the  defend- 
ant, in  support  of  his  contention  in  this  case,  are  to  the  effect  that 
property  brought  into  the  partnership  business  by  the  members  of 
the  firm,  or  bought  with  capital  advanced,  becomes  partnership 
property,  and  may  be  disposed  of  as  such  by  one  of  the  partners 
under  his  general  powers  as  a  member  of  the  firm.  And  so  it  does 
beyond  all  question,  for  the  very  object  of  contributing  capital, 
either  in  property  or  money,  is  to  secure  a  partnership  stock  for  the 
purpose  of  carrying  on  the  common  business.  But  this  fact  has 
nothing  to  do  with  the  settlement  between  the  partners  of  their 
accounts  at  the  end  of  the  partnership.  Mr.  Lindley  says : 

By  the  capital  of  a  partnership  is  meant  the  aggregate  of  the  sums 
contributed  by  its  members  for  the  purpose  of  commencing  or  carrying 


DISSOLUTION  OF  THE  BUSINESS  UNIT  627 

on  the  partnership  business.  The  capital  of  a  partnership  is  not  therefore 
the  same  as  its  property;  the  capital  is  a  sum  fixed  by  the  agreements  of 
the  partners,  whilst  the  actual  assets  of  the  firm  vary  from  day  to  day,  and 
everything  belonging  to  the  firm  and  having  any  money  value.  Moreover, 
the  capital  of  each  partner  is  not  necessarily  the  amount  due  to  him  from 
the  firm;  for  not  only  may  he  owe  the  firm  money,  so  that  less  than  his 
capital  is  due  to  him,  but  the  firm  may  owe  him  money  in  addition  to  his 
capital,  e.g. ,  for  money  loaned.  The  amount  of  each  partner's  capital  ought 
therefore  always  to  be  accurately  stated,  in  order  to  avoid  disputes  upon  a 
final  adjustment  of  accounts;  and  this  is  more  important  where  the  capitals 
of  the  partners  are  unequal,  for  if  there  is  no  evidence  as  to  the  amounts 
contributed  by  them,  the  shares  of  the  whole  assets  will  be  treated  as 
equal. — Lindley  on  Partnership,  page  610  [i  Ewell's  Lindley,  2d  Am.  Ed.  320]. 

The  same  author  adds  in  another  place: 

When  it  is  said  that  the  shares  of  partners  are  prima  facie  equal, 
although  their  capitals  are  unequal,  what  is  meant  is  that  the  losses  of 
capital,  like  other  losses,  must  be  shared  equally,  but  it  is  not  meant  that 
on  a  final  settlement  of  accounts  capitals  contributed  unequally  are  to  be 
treated  as  an  aggregate  fund  which  ought  to  be  divided  between  the  part- 
ners in  equal  shares. — Lindley  on  Partnership,  page  67. 

On  the  contrary,  in  his  chapter  devoted  to  partnership  accounts 
(2  Lindley,  Partnership,  2d  Am.  Ed.  402),  he  expressly  tells  us  that 
the  assets  of  a  partnership  should  be  applied  as  follows : 

1 .  In  paying  the  debts  and  liabilities  of  the  firm  to  non-partners. 

2.  In  paying  to  each  partner  ratably  what  is  due  from  the  firm  to  him 
for  advances  as  distinguished  from  capital. 

3.  In  paying  to  each  partner  ratably  what  is  due  from  the  firm  to  him 
in  respect  of  capital. 

4.  The  ultimate  residue,  if  any,  will  then  be  divisible  as  profit  between 
the  partners  in  equal  shares,  unless  the  contrary  intent  can  be  shown. 

In  accordance  with  these  principles,  the  following  decision  has 
been  made  by  the  supreme  court  of  New  York  in  a  case  cited  in  a  note 
to  page  610  of  Lindley  on  Partnership: 

Where  by  the  terms  of  the  agreement  the  defendant  furnished  the 
capital  stock,  and  the  plaintiff  contributed  his  skill  and  services,  and  the 
profits  of  the  copartnership  were  to  be  equally  divided,  the  plaintiff  is  not 
entitled  to  any  part  of  the  capital  stock  on  a  settlement  of  the  affairs  of  the 
partnership.  He  has  no  interest  in  any  part  of  the  capital  excepting  so 
far  as  in  the  progress  of  the  business  the  same  may  have  been  converted 
into  profits. — Conroy  v.  Campbell,  13  Jones  &  Sp.  326. 


628  LAW  AND  BUSINESS 

The  case,  it  will  be  noticed,  is  exactly  in  point.  And  to  the  same 
effect  in  principle  are  Whitcomb  v.  Con-verse,  119  Mass.  38,  20  Am. 
Rep.  311,  ante;  Knight  v.  Ogden,  2  Tenn.  Ch.  473,  and  Shepherd,  Ex 
parte,  3  Tenn.  Ch.  189.  No  case  has  been  found  to  the  contrary. 

Chancellor's  decree  affirmed. 

QUESTIONS 

1.  The  firm  of  Smith  and  Brown  terminated  by  lapse  of  the  time  for  which 
it  was  created.    Brown  is  in  possession  of  the  records  and  property  of 
the  partnership.    He  refuses  to  account  to  Smith  for  his  interest  in  the 
firm  and  is  still  carrying  on  the  business  in  the  firm  name  against 
the  objections  of  Smith.    What  are  the  rights  of  Smith  under  the 
circumstances  ? 

2.  Smith  contributed  $12,500  to  the  capital  of  the  firm  and  Brown  con- 
tributed $7,500,  but  it  was  understood  that  Brown  should  devote  his 
entire  time  and  attention  to  the  management  of  the  business  to  offset 
the  difference  in  their  respective  contributions  to  the  capital  of  the 
partnership.    At  the  time  of  the  dissolution,  the  firm  had  assets  aggregat- 
ing $35,000.    The  firm  owed  B,  $6,000;    C,  $3,500;    and  D,  $3,000. 
The  firm  had  made  a  loan  of  $2,500  to  Brown  which  had  not  been 
repaid.     Smith  had  advanced  $5,000  to  the  business  which  had  not  been 
returned.    How  should  the  assets  of  the  partnership  be  divided  by  a  court 
upon  dissolution  ? 

3.  Suppose  that  the  assets  of  the  partnership  in  the  foregoing  case  had 
amounted  to  $45,000  at  dissolution,  how  should  the  amount  be  divided? 

4.  A  and  B  enter  into  a  partnership  with  the  understanding  that  A  is  to 
contribute  $5,000  as  capital,  that  B  is  to  contribute  his  skill  and  services 
and  that  they  are  to  share  profits  and  losses  equally.    At  the  termination 
of  the  firm,  its  assets,  after  all  liabilities  have  been  discharged,  amount 
to  $6,500.    How  should  this  amount  be  divided  between  A  and  B  ? 

5.  In  the  foregoing  case,  the  assets  of  the  firm,  after  all  liabilities  have  been 
discharged,  amount  to  $4,000.    How  should  the  affairs  of  the  business 
be  adjusted  as  between  A  and  B  ? 

THE  BOSTON  GLASS  MANUFACTORY  v.  LANGDON 
24  Pickering's  Massachusetts  Reports  49  (1834) 

Assumpsit  on  a  promissory  note  given  by  the  defendant  to  the 
plaintiffs.  The  defendant  pleads  in  abatement,  that  at  the  time  of 
the  purchase  of  the  writ  there  was  not,  and  now  is  not,  any  such 
corporation  established  by  law,  called  the  Boston  Glass  Manufactory, 
as  in  and  by  the  writ  is  supposed.  The  plaintiffs  reply  that  there 
was  and  is  such  a  corporation,  and  tender  an  issue,  which  is  joined. 


DISSOLUTION  OF  THE  BUSINESS  UNIT  629 

At  the  trial,  before  MORTON,  J.,  the  plaintiffs  offered  in  evidence 
their  act  of  incorporation,  and  showed  their  organization  under  it  in 
1811. 

The  records  of  the  corporation  were  introduced  by  the  plaintiffs, 
and  were  used  and  relied  upon  by  both  parties. 

The  defendant  then  introduced  an  indenture,  dated  May  27, 
1827,  assigning  all  the  property  of  the  corporation  to  certain  persons, 
in  trust  to  pay,  pro  rata,  such  creditors  as  should  become  parties 
to  the  indenture.  This  instrument  contained  covenants,  that  the 
assignees  might  use  the  name  of  the  corporation  in  the  collection  of 
the  debts,  and  in  the  disposition  of  the  property  assigned;  that  the 
corporation  would  not  hinder  or  obstruct  them  in  the  performance 
of  these  functions;  and  that  it  would  make  any  further  conveyances 
and  assurances  which  might  become  necessary,  and  perform  any 
other  and  further  acts  which  might  be  required  to  enable  the  assignees 
fully  to  execute  their  trust.  No  provision  was  made  for  a  release  to 
the  corporation  by  the  creditors,  nor  for  paying  over  to  the  corpora- 
tion the  surplus,  if  any,  of  the  property  assigned.  The  defendant 
also  referred  to  all  the  records  subsequent  to  1817,  and  contended 
that  the  assignment  of  the  property  of  the  corporation,  and 
the  omission  to  hold  annual  meetings,  to  choose  directors,  and  to 
transact  business,  as  appears  by  the  records  and  books  of  the 
corporation,  supported  the  issue  on  her  part  and  entitled  her  to  a 
verdict. 

But  the  jury  were  instructed  that  the  evidence  was  competent  to 
prove  the  establishment  and  continuance  of  the  corporation  down  to 
the  present  time. 

The  plaintiffs  then  claimed  to  have  the  damages  assessed  by  the 
jury,  if  they  found  a  verdict  in  their  favor,  and  offered  in  evidence  the 
note  declared  on.  This  was  objected  to  by  the  defendant,  because 
the  note  had  been  assigned.  But  the  objection  was  overruled. 

The  jury  found  a  verdict  for  the  plaintiffs  for  the  whole  amount 
of  the  note  and  interest. 

The  defendant  excepted  to  the  decisions  and  instructions  of  the 
judge;  and  for  the  reasons  above  appearing,  moved  for  a  new  trial. 

MORTON,  J.  The  principal  question  for  our  consideration  is 
whether  judgment  shall  be  rendered  on  the  verdict.  The  defendant's 
counsel  contends  that  the  evidence  introduced  will  not  support  the 
verdict,  but  that  the  verdict  is  against  the  evidence  and  the  law  and 
should  be  set  aside. 


630  LAW  AND  BUSINESS 

The  legal  establishment  and  due  organization  of  the  corporation 
were  admitted;  but  it  was  contended  that  the  facts  disclosed  showed 
a  dissolution  of  it. 

The  elementary  treatises  on  corporations  describe  four  methods 
in  which  they  may  be  dissolved.  It  is  said  that  private  corporations 
may  lose  their  legal  existence  by  the  act  of  the  legislature;  by  the 
death  of  all  the  members;  by  a  forfeiture  of  their  franchises;  and  by 
a  surrender  of  their  charters.  2  Kyd  on  Corporations,  page  447; 
i  Bl.  Comm.,  page  485;  2  Kent's  Comm.  (ist.  ed.)  245;  Angell  & 
Ames  on  Corporations,  page  501;  Oakes  v.  Hill,  14  Pick.  442.  No 
other  mode  of  dissolution  is  anywhere  mentioned  or  alluded  to. 

1.  In  England,  where  the  parliament  is  said  to  be  omnipotent  and 
where  in  fact  there  is  no  constitutional  restraint  upon  their  action, 
but  their  own  discretion  and  sense  of  right,  corporations  are  supposed 
to  hold  their  franchises  at  the  will  of  the  legislature.     But  if  they 
possess   the  power  to  annul   charters,  it  certainly  has  been  rarely 
exercised  by  them.     In  this  country,  where  the  legislative  power  is 
carefully  defined  by  explicit  fundamental  laws,  by  which  it  must  be 
governed  and  beyond  which  it  cannot  go,  it  has  become  a  question 
of  some  difficulty  to  determine  the  precise  extent  of  their  authority 
in  relation  to  revocation  of  charters  granted  by  them.     But  as  it  is 
not  pretended  that  there  has  been  any  legislative  repeal  of  the  plain- 
tiffs' charter,  it  will  not  be  useful  further  to  discuss  this  branch  of 
the  subject. 

2.  As  all  the  original  stockholders  are  not  deceased,  the  corpora- 
tion cannot  be  dissolved  for  the  want  of  members  to  sustain  and 
exercise  the  corporate  powers.     Besides,   this  mode  of  dissolution 
cannot  apply  to  pecuniary  or  business  corporations.     The  shares, 
being  property,  pass  by  assignment,  bequest,  or  descent,  and  must 
ever  remain  the  property  of  some  persons,  who  of  necessity  must  be 
members  of  the  corporation  as  long  as  it  may  exist. 

3.  Although  a  corporation  may  forfeit  its  charter  by  an  abuse  or 
misuse  of  its  powers  and  franchises,  yet  this  can  only  take  effect  upon 
a  judgment  of  a  competent  tribunal.    2  Kent's  Comm.  (ist  ed.)  page 
249;    Corporation   of  Colchester  v.   Seaber,   3   Burr.    1866;    Smith's 
Case,  4  Mod.  53.     Whatever  neglect  of  duty  or  abuse  of  power  the 
corporation  may  have  been  guilty  of,  it  is  perfectly  clear  that  they 
have  not  lost  their  charter  by  forfeiture.     Until  a  judicial  decree  to 
this  effect  be  passed,  they  will  continue  their  corporate  existence. 
The  King  v.  Amery,  2  T.R.  515. 


DISSOLUTION  OF  THE  BUSINESS  UNIT  631 

4.  Charters  are  in  many  respects  compacts  between  the  govern- 
ment and  the  corporators.  And  as  the  former  cannot  deprive  the 
latter  of  their  franchises  in  violation  of  the  compact,  so  the  latter 
cannot  put  an  end  to  the  compact  without  the  consent  of  the  former. 
It  is  equally  obligatory  on  both  parties.  The  surrender  of  a  charter 
can  only  be  made  by  some  formal  solemn  act  of  the  corporation;  and 
will  be  of  no  avail  until  accepted  by  the  government.  There  must  be 
the  same  agreement  of  the  parties  to  dissolve  that  there  was  to  form 
the  compact.  It  is  the  acceptance  which  gives  efficacy  to  the  sur- 
render. The  dissolution  of  a  corporation,  it  is  said,  extinguishes  all 
its  debts.  The  power  of  dissolving  itself  by  its  own  act,  would  be  a 
dangerous  power,  and  one  which  cannot  be  supposed  to  exist. 

But  there  is  nothing  in  this  case  which  shows  an  intention  of  the 
corporators  to  surrender  or  forfeit  their  charter,  nor  anything  which 
can  be  construed  into  a  surrender  of  forfeiture. 

The  possession  of  property  is  not  essential  to  the  existence  of  a 
corporation.  2  Kent's  Comm.  (ist  ed.),  page  249.  Its  insolvency 
cannot,  therefore,  extinguish  its  legal  existence.  Nor  can  the  assign- 
ment of  all  its  property  to  pay  its  debts,  or  for  any  other  purpose,  have 
that  effect.  The  instrument  of  assignment  was  not  so  intended,  and 
cannot  be  so  construed.  All  its  provisions  look  to  the  continuance 
of  the  corporation.  It  contains  covenants  that  the  assignees  may 
use  the  corporate  name  for  the  collection  of  the  debts  and  the  disposi- 
tion of  the  property  assigned;  that  the  corporation  will  not  hinder 
or  obstruct  them  in  the  performance  of  these  functions;  that  it  will 
make  any  further  conveyances  and  assurances  which  may  become 
necessary,  and  will  do  and  perform  any  other  and  further  acts  which 
may  be  required  to  enable  the  assignees  fully  to  execute  their  trust. 
The  instrument,  which  covenants  for  future  acts,  cannot  be  construed 
to  take  away  all  power  of  action. 

The  omission  to  choose  directors  clearly  does  not  show  a  dissolu- 
tion of  the  corporation.  Although  the  proper  officers  may  be  neces- 
sary to  enable  the  body  to  act,  yet  they  are  not  essential  to  its 
vitality.  Even  the  want  of  officers  and  the  want  of  power  to  elect 
them  would  not  be  fatal  to  its  existence.  It  has  a  potentiality  which 
might,  by  proper  authority,  be  called  inlo  action,  without  affecting 
the  identity  of  the  corporate  body.  Colchester  v.  Seaber,  3  Burr. 
1870. 

But  here  in  fact  was  no  lack  of  officers.  Although  no  directors 
had  been  chosen  for  several  years,  yet,  by  the  by-laws  of  the  corpora- 


632  LAW  AND  BUSINESS 

tion,  the  directors,  though  chosen  for  one  year,  were  to  continue  in 
office  till  others  were  chosen  in  their  stead. 

The  damages  were  properly  assessed  by  the  jury.  The  defendant, 
having  elected  to  try  her  case  upon  a  plea  in  abatement,  must  sub- 
mit to  the  legal  consequences  of  that  form  of  trial.  Perhaps  the  court 
might  have  assessed  the  damages  as  in  case  of  default.  But  most 
obviously  the  better  course  was  to  submit  the  subject  to  a  jury.  In 
doing  this  the  defendant  could  not  be  allowed  to  go  into  the  whole 
defense  as  upon  the  general  issue.  The  rule  adopted  at  the  trial  was 

the  correct  one. 

Judgment  according  to  verdict. 

QUESTIONS 

1.  In  what  different  ways  may  a  corporation  be  dissolved  ? 

2.  S  becomes  the  sole  stockholder  in  the  D  Company.     Does  this  effect  a 
dissolution  of  the  corporation  ? 

3.  S  dies  leaving  no  heirs.     Does  this  cause  a  dissolution  of  the  corporation  ? 

4.  The  stockholders  vote  to  dissolve  their  corporation.     They  distribute 
all  the  corporate  assets  among  themselves.     The  directors  resign.     For 
ten  years  nothing  is  done  in  the  name  of  the  corporation.     Is  the  corpora- 
tion dissolved  ? 

5.  The  D  Company  is  chartered  for  a  period  of  thirty  years.     Before  the 
expiration  of  this  time,  the  legislature  passes  an  act  repealing  the  charter 
of  the  corporation.     The  corporation  contends  that  the  law  is  uncon- 
stitutional because  it  violates  that  provision  of  the  Federal  Constitution 
which  forbids  a  state  to  pass  a  law  impairing  the  obligation  of  a  contract. 
What  decision  ? 

6.  Would  your  answer  be  the  same  in  the  foregoing  case  if  the  state  in  ques- 
tion had  reserved  the  power  to  alter,  repeal,  or  amend  the  charter  of  the 
corporation  ? 


GOODWIN  v.  VON  COTZHAUSEN 

171  Wisconsin  Reports  351  (1920) 

This  action  was  commenced  in  June,  1915,  by  the  plaintiffs,  H.W. 
Goodwin,  as  administrator  of  the  estate  of  J.  Arthur  Davis,  deceased, 
and  F.  B.  Thomas,  minority  stockholders  of  the  Milwaukee  Litho- 
graphing Co.,  and  Alfred  von  Cotzhausen,  its  president,  general 
manager,  and  treasurer,  and  other  officers,  for  said  corporation  to 
take  charge  of  all  its  property  and  assets  and  to  administer  the  same 
pending  the  determination  of  this  suit,  and  for  the  restitution  of 


DISSOLUTION  OF  THE  BUSINESS  UNIT  633 

funds  alleged  to  have  been  unlawfully  abstracted  therefrom  by  the 
said  von  Cotzhausen  and  other  officers  and  directors  of  the  corpora- 
tion. The  suit  was  brought  by  plaintiffs  on  their  own  behalf  and  on 
behalf  of  all  other  stockholders  similarly  situated.  Their  petitions 
were  made  by  Edgar  A.  Goetz  and  Lillie  A.  Brosius,  also  minority 
stockholders,  and  they  were  made  parties  plaintiff,  and  they  served 
separate  supplemental  complaints  and  a  joint  second  supplemental 
complaint,  demanding  a  winding  up  of  all  the  business,  property,  and 
affairs  of  the  Milwaukee  Lithographing  Co.,  a  conversion  thereof  into 
cash,  to  be  applied  to  the  payment  of  debts  and  then  distributed 
among  the  stockholders. 

Upon  motion  made  October  9,  1915,  a  receiver  was  appointed 
March  9,  1916,  who  took  charge  of  the  property,  business,  and  affairs 
of  the  said  Milwaukee  Lithographing  Co.  and  continued  to  admin- 
ister the  same  until  the  entry  of  the  judgment  herein. 

OWEN,  J.  We  have  for  consideration  questions  raised  by  the 
appeals  of  Alfred  von  Cotzhausen,  Friedericke  Bode,  and  H.  W. 
Goodwin.  Separate  briefs  were  filed  by  Alfred  von  Cotzhausen  and 
Friedericke  Bode.  Neither  brief  contains  any  assignment  of  error, 
nor  is  any  finding  of  fact  challenged  in  either  brief.  While  it  is  to 
be  gathered  from  the  brief  of  the  appellant  Alfred  von  Cotzhausen 
that  he  is  dissatisfied  with  the  findings  and  with  the  judgment  in 
general,  there  is  no  efficient  challenge  of  any  particular  finding,  nor 
is  there  any  reference  in  the  brief  to  any  evidence  in  the  record,  or  in 
the  printed  case  prepared  upon  the  appeal  of  H.  W.  Goodwin  (which 
is  the  only  case  prepared  by  any  of  the  appellants),  to  impeach  the 
findings  made  by  the  referee  and  confirmed  by  the  court.  The 
record  in  the  case  is  exceedingly  voluminous,  consisting  of  over 
6,000  pages  of  typewritten  matter  and  six  large  boxes  of  exhibits,  and 
a  general  examination  thereof  for  the  purpose  of  verifying  the  findings 
of  the  referee  cannot  be  undertaken.  Under  the  circumstances,  there- 
fore, the  findings  of  fact  must  be  regarded  as  conclusive  upon  the 
appellants,  Alfred  von  Cotzhausen  and  Friedericke  Bode. 

We  may,  however,  consider  the  question  of  whether  the  judgment 
or  interlocutory  decree  from  which  the  appeal  is  taken  is  warranted 
by  the  findings.  The  appellants  Bode  and  von  Cotzhausen  assail 
that  part  of  the  interlocutory  decree  which  provides  for  a  sale  of  the 
assets  of  the  corporation,  a  distribution  of  the  proceeds  among  the 
creditors  and  stockholders,  and  a  winding  up  of  its  affairs.  This  is 
the  vital  question  in  the  case  as  it  is  submitted. 


634  LAW  AND  BUSINESS 

It  is  contended  that  a  court  of  equity  has  no  power  or  jurisdiction, 
at  the  suit  of  a  minority  stockholder,  in  the  absence  of  statutory 
authority,  to  appoint  a  receiver  for  a  corporation  and  wind  up  its 
affairs.  That  such  was  the  well-nigh  universal  rule  until  a  compara- 
tively recent  date  cannot  be  doubted.  This  rule  had  its  origin  at  a 
time  when  corporations  were  created  by  special  charters  the  grants  of 
which  conferred  valuable  and  exclusive  franchises  upon  their  grantees, 
and  it  was  considered  that,  as  the  franchises  were  granted  by  the  state, 
they  could  be  vacated  or  forfeited  only  in  a  proceeding  by  the  state; 
that  their  lives  depend  upon  the  action  of  the  state  or  the  stockholders 
as  a  whole.  The  reason  for  this  rule  has  entirely  ceased  in  respect 
to  the  ordinary  business  corporation  formed  under  general  laws,  the 
privileges  conferred  upon  which  are  open  to  all  who  comply  with 
statutory  conditions,  which  conditions  are  simple  and  formal  in  char- 
acter and  may  readily  be  complied  with  by  any  who  desire  to  associate 
themselves  for  the  prosecution  of  any  business  venture.  The  ordi- 
nary business  corporations  are  not  organized  for  the  purpose  of 
performing  any  public  function  and  the  state  has  no  particular  interest 
in  them.  It  is  only  those  who  invest  their  money  in  them  as  stock- 
holders or  bondholders,  and  creditors  thereof,  who  have  a  substantial 
interest  in  their  proper  management  and  business  success.  True, 
statutory  regulations  exist,  but  such  regulations  are  enacted  for  the 
benefit  and  protection  of  those  financially  interested  in  the  corpora- 
tion and  not  for  the  protection  of  the  state.  The  passing  interest  of 
the  state  in  their  continuance  is  well  illustrated  by  the  fact  that  a 
dissolution  of  the  corporation  automatically  follows  upon  its  failure 
to  file  certain  reports  in  the  office  of  the  secretary  of  the  state.  Sec- 
tion i774a,  Stats.  If  the  corporation  were  an  institution  in  which 
the  state  had  a  special  interest,  its  life  would  not  be  so  summarily 
snuffed  out  for  its  mere  failure  to  report  the  names  and  addresses  of 
its  officers  to  a  public  official. 

The  trend  of  modern  decisions  is  in  recognition  of  this  growing 
distinction  between  the  present  and  the  original  corporation,  and  there 
is  now  a  respectable  array  of  judicial  authority  for  the  proposition  that 
where  a  corporation  has  been  plundered  by  its  officers,  or  they  have 
so  mismanaged  its  affairs  as  to  bring  it  to  the  verge  of  bankruptcy, 
threatening  the  minority  stockholders  with  loss  of  their  investment, 
and  it  seems  certain  that  the  purposes  for  which  the  corporation  was 
organized  are  no  longer  attainable,  and  there  is  no  other  adequate 
remedy,  a  court  of  equity,  in  the  exercise  of  its  inherent  power,  may 


DISSOLUTION  OF  THE  BUSINESS  UNIT  635 

distribute  its  assets,  and  decree  a  dissolution  thereof  at  the  suit  of  a 
minority  stockholder.  Miner  v.  Belle  Isle  Ice  Co.,  93  Mich.  97,  53 
N.W.  218;  Red  Bud  Realty  Co.  v.  South,  96  Ark.  281,  131  S.W.  340; 
Gibbs  v.  Morgan,  9  Idaho,  100,  72  Pac.  733;  Riley  v.  Callahan  M.  Co., 
28  Idaho,  525,  155  Pac.  665;  Thwing  v.  McDonald,  134  Minn.  148, 
158  N.W.  820;  Phinzy  v.  Anniston  City  Light  Co.,  195  Ala.  656,  71 
South.  1018;  Exchange  Bank  v.  Bailey,  29  Okla.  246,  116  Pac.  812; 
Metropolitan  Fire  Insurance  Co.  v.  Middendorf,  171  Ky.  771,  188  S.W. 
790.  In  the  above-cited  cases  the  principle  was  either  applied  or 
recognized  that  where  the  officers  and  directors,  or  majority  stock- 
holders, exercising  exclusive  management  and  control  over  a  corpora- 
tion, have  abused  their  power  and  proved  recreant  to  their  trust  by 
fraudulently  conducting  the  affairs  of  the  company  so  as  to  appropri- 
ate to  themselves  the  profits  and  property  thereof,  to  the  detriment 
of  the  minority  stockholders,  and  the  corporation  is  on  the  verge 
of  bankruptcy,  and  the  attainment  of  the  purposes  for  which  it  was 
organized  is  no  longer  possible,  and  there  is  no  other  adequate  remedy 
for  the  protection  of  the  minority  stockholders,  a  court  of  equity  may, 
at  the  suit  of  a  minority  stockholder,  appoint  a  receiver  for  the  prop- 
erty of  the  corporation,  decree  a  winding  up  of  its  affairs  and  a  dissolu- 
tion of  the  corporation  itself. 

The  fading  analogy  between  the  present  business  corporation  and 
the  corporation  as  originally  conceived,  was  recognized  by  this  court 
in  Katz  v.  de  Wolf,  151  Wis.  337,  138  N.W.  1013,  where  it  was  said: 

The  development  of  corporation  law  began  with  a  strictness  of  analogy 
between  municipal  and  stock  corporations  which  is  no  longer  fully  observed. 
The  change  from  the  ancient  mode  of  creating  corporations  by  special  act 
to  permit  organizations  by  public  declaration  or  contractual  undertakings 
acknowledged  and  filed  in  a  public  office,  and  the  great  multiplication  of 
corporations  thereunder,  caused  some  further  change.  There  is  unquestion- 
ably a  broad  power  of  equity  applicable  wherever  wrong  is  shown  of  such  a 
nature  as  to  arouse  the  equitable  jurisdiction. 

While  the  case  did  not  present  a  situation  calling  for  the  exercise 
of  the  power,  the  language  quoted  forecast  the  opinion  of  this  court 
with  reference  to  its  existence  as  well  as  its  disposition  to  the  exercise 
thereof.  We  agree  with  the  Idaho  court  that 

The  early  doctrine  that  the  affairs  of  a  corporation  could  not  be  inquired 
into  except  by  permission  of  the  attorney  general,  and  that  courts  of  equity 
should  not  interfere  with  the  power  and  authority  of  the  directors  of  a 
corporation  because  that  would  result  in  its  dissolution,  has  been  modified 


636  LAW  AND  BUSINESS 

to  meet  existing  conditions.  A  large  part  of  the  business  of  the  world  is 
done  through  corporations,  and  ....  courts  of  equity  should  adapt  their 
practice  as  far  as  possible  to  the  existing  state  of  society,  and  apply  their 
jurisdiction  to  all  those  new  cases  which,  from  the  progress  daily  making 
in  the  affairs  of  men,  must  continually  arise,  and  should  not,  from  too  strict 
an  adherence  to  the  forms  and  rules  established  under  very  different  circum- 
stances, decline  to  administer  justice  and  to  enforce  rights  for  which  there 
is  no  other  remedy. — Gibbs  v.  Morgan,  supra. 

The  power,  however,  is  one  to  be  exercised  with  great  caution. 
It  is  inherent  in  the  nature  of  corporations  that  the  affairs  thereof 
are  to  be  managed  and  directed  as  willed  by  the  majority  of  the  stock- 
holders. Their  decisions  within  the  scope  of  legitimate  discretion 
cannot  be  interfered  with,  and  even  though,  in  the  opinion  of  the 
minority,  the  policies  adopted  by  the  majority  are  not  for  the  best 
interests  of  the  corporation,  nevertheless  they  must  accept  such  deci- 
sions and  acquiesce  therein.  They  cannot  complain  thereof  unless 
they  be  prompted  by  fraud  and  bad  faith,  resulting  in  the  spoliation 
of  the  minority  stockholders  and  ruin  to  the  corporation. 

With  this  understanding  of  the  power  of  the  court  in  the  premises, 
let  us  consider  the  record  in  this  case  with  a  view  of  determining 
whether  the  circumstances  here  disclosed  present  a  proper  situation 
for  the  exercise  of  this  power. 

The  tabulation  set  forth  in  the  statement  of  facts  showing  the 
course  of  business  of  the  company  from  the  year  1913  down  to  the 
appointment  of  the  receiver  March  9,  1916,  shows  that  up  to  the  year 
1913,  the  year  during  which  the  defendant  von  Cotzhausen  acceded 
to  the  presidency  and  general  management  thereof,  the  company  did 
a  thriving  business,  earned  handsome  profits,  and  paid  gratifying 
dividends.  In  the  year  1912  the  company  made  profits  of  $45,465.50. 
In  1913  they  dwindled  to  $11,617.64.  In  1914  there  were  losses  of 
$21,260.85.  The  losses  during  1915,  up  to  November  12,  were 
$29,592.08,  and  from  November  12,  1915,  to  March  9,  1916,  there 
were  further  losses  of  $22,772.92.  The  amount  of  sales  in  1912  was 
$310,697.23.  In  1914,  the  first  full  year  of  management  by  von 
Cotzhausen,  the  sales  were  $164,508.45  a  dropping  off  of  nearly  50 
per  cent.  .The  first  months  of  1915  the  sales  were  only  $25,783.23, 
and  from  July  12  to  November  12  of  the  same  year  the  amount  of 
sales  was  $15,086.94.  This  shows  an  amazing  decrease  in  the  busi- 
ness and  indicates  that  in  but  a  short  time  the  business  would  be 
practically  nil.  One  marvels  at  the  possibility  of  such  a  slump  in 


DISSOLUTION  OF  THE  BUSINESS  UNIT  637 

such  a  short  time,  but  the  record  furnishes  ample  evidence  of  the 
reason  thereof. 

When  von  Cotzhausen  assumed  management  of  the  company 
there  was  a  well-organized  sales  force.  There  was  a  general  sales 
agent  on  the  Pacific  Coast,  one  in  New  York,  one  in  New  Orleans,  and 
two  in  Chicago.  These  sales  agents  were  procuring  business  for  the 
company.  Good  business  judgment  would  plainly  require  a  continu- 
ance of  cordial  relations  between  these  sales  agents  and  the  company 
and  a  retention  of  their  services.  The  evidence  discloses,  however, 
that  von  Cotzhausen  immediately  proceeded  to  get  into  a  row  with 
all  these  man  and  made  it  so  disagreeable  for  them  that  they  quit 
the  service  of  the  company.  The  services  of  one  Frank  W.  Went- 
worth,  of  Chicago,  appear  to  have  been  particularly  valuable  to  4Jie 
company.  With  reference  to  him  the  referee  finds: 

That  Frank  W.  Wentworth  became  connected  with  the  Milwaukee 
Lithographing  Co.  in  1902,  soon  after  the  organization  of  said  company, 
first  as  agent,  and  later  as  the  agent,  representative,  and  manager  of  Chicago 
of  said  company,  and  as  such  controlled  the  so-called  Wrigley  business; 
that  he  continued  as  such  agent,  representative,  and  manager  until  April  17, 
1914,  when  said  Wentworth  severed  his  connection  with  said  company; 
that  during  the  year  1910  tjie  said  company  shipped  goods,  the  orders  for 
which  were  obtained  by  Wentworth,  in  the  amount  of  $103,171.30;  in  1911, 
$186,121.35;  in  1912,  $151,470.81;  in  1913,  $132,531.63;  or  a  total  of 
$573,295.09;  that  the  total  business  of  said  company  during  said  four 
years  aggregated  $1,355,595.99;  that  after  said  April  17,  1914,  the  whole 
of  said  Wrigley  business  was  withdrawn  by  said  Wentworth  from  and 
lost  to  the  said  company;  that  as  a  result  of  such  withdrawal  and  loss 
the  successful  operation  of  said  company  as  a  profitable  business  enter- 
prise was  greatly  impaired. 

Instead  of  maintaining  satisfactory  arrangements  with  the  said 
Frank  W.  Wentworth,  von  Cotzhausen  started  an  action  against  him 
to  recover  for  the  company  $36,000  which  he  claimed  Wentworth 
owed  to  it  for  overcharges,  which  the  referee  finds  to  have  been 
unfounded,  resulting  in  the  loss  of  Wentworth's  services  and  the 
business  which  he  secured  for  the  company. 

This  furnishes  but  a  glimpse  of  the  real  character,  attitude,  and 
diplomacy  of  the  said  von  Cotzhausen  and  is  but  a  small  part  of  the 
evidence  which  justifies  the  finding  of  the  referee  "  that  the  defendant 
Alfred  von  Cotzhausen  for  many  years  past  had  and  still  has  the 
reputation  among  the  trade  and  business  in  which  the  Milwaukee 


638  LAW  AND  BUSINESS 

Lithographing  Co.  is  engaged,  as  being  unreasonable,  unreliable, 
dishonest,  and  litigious,  and  as  being  a  dangerous  man  to  deal 
with." 

There  are  unpaid  judgments  against  the  company  amounting  to 
$12,557.11,  together  with  accrued  interest,  and  it  owes  the  Marshall  & 
Ilsley  Bank  $17,500.  While  this  would  not  be  a  forbidding  indebted- 
ness for  a  going  concern  of  the  size  of  the  Milwaukee  Lithographing 
Co.,  it  is  nevertheless  a  serious  matter  in  view  of  the  fact  that  the 
company  was  running  at  a  loss  for  more  than  two  years  preceding  the 
appointment  of  the  receiver. 

We  cannot  escape  the  conclusion  that  this  company  can  be  no 
longer  operated  under  von  Cotzhausen's  domination  and  control 
except  to  its  own  ruin  and  the  loss  by  the  stockholders  of  their  entire 
investment.  The  purposes  for  which  the  company  was  organized  are 
no  longer  possible  of  accomplishment,  and  the  only  rational  thing 
to  do  is  to  wind  up  its  affairs  and  save  the  stockholders  from  further 
loss;  from  which  it  results  that  that  feature  of  the  interlocutory  decree 
providing  for  a  sale  of  the  assets  of  the  company  and  a  winding  up  of 
its  affairs  should  not  be  disturbed. 

The  appellant  Goodwin  complains  because  the  court  reduced  the 
amount  of  general  damages,  found  by  tjie  referee  to  have  been 
$60,000  to  $30,000.  In  Huebner  v.  Huebner,  163  Wis.  166,  157 
N.W.  765,  it  was  said:  "The  rule  is  well  established  in  this  court  that 
past  profits  of  an  established  business  constitute  a  legitimate  basis 
upon  which  to  estimate  the  future  profits  of  the  same  business  con- 
ducted in  the  same  manner,  and  that  in  a  proper  case  such  future 
profits  may  be  recovered  when  the  plaintiff  has  been  prevented  from 
making  them  by  the  wrongful  conduct  of  the  defendant." 

We  know  of  no  reason  why  that  principle  is  not  applicable  to  the 
instant  case.  It  is  settled  by  the  decisions  of  this  court  that  where 
there  is  ample  evidence  to  support  a  referee's  findings  of  fact  and  no 
clear  preponderance  against  them,  the  trial  court  is  not  justified  in 
setting  them  aside.  Erickson  v.  McGeehan  C.  Co.,  107  Wis.  49,  82 
N.W.  694;  Ott  v.  Boring,  139  Wis.  403,  121  N.W.  126;  Wojahn  v. 
National  Union  Bank,  144  Wis.  646,  129  N.W.  1068.  The  evidence 
to  which  our  attention  has  been  called  clearly  sustains  the  amount 
of  damages  as  founded  by  the  referee.  If  there  is  any  evidence  what- 
ever against  this  finding  it  has  not  been  pointed  out  to  us,  and  our 
conclusion  is  that  the  trial  court  was  not  warranted  in  reducing  the 
damages  in  this  respect  from  $60,000,  as  found  by  the  referee,  to 


DISSOLUTION  OF  THE  BUSINESS  UNIT  639 

$30,000.  The  interlocutory  decree  should  therefore  be  modified  by 
substituting  $60,000,  the  amount  found  by  the  referee  for  general 
damages,  for  $30,000,  the  amount  thereof  as  fixed  and  determined  by 
the  trial  court. 

By  the  interlocutory  decree  it  is  adjudged  that  the  plaintiffs 
Brosius  and  Goetz  are  entitled  to  just  and  reasonable  compensation 
for  their  attorneys'  services  and  other  expenses  paid  or  incurred  in 
this  action  and  that  the  amount  thereof  should  be  determined  by  the 
court  or  referee  after  the  sale  of  the  property  and  effects  of  the  com- 
pany has  been  made  and  the  affairs  of  the  company  liquidated  before 
the  final  decree  shall  have  been  entered  herein,  to  be  paid  out  of  the 
corporate  assets  of  the  Milwaukee  Lithographing  Co. .  Of  this  pro- 
vision the  plaintiff  and  appellant  Goodwin  complains,  his  position 
being,  as  we  understand  it,  that,  as  he  originally  commenced  the 
action,  he  is  the  only  party  who  should  be  compensated  out  of  the 
fund  conserved  for  attorneys'  services  and  other  -expenses.  The 
plaintiffs  Brosius  and  Goetz  were  made  parties  plaintiff  by  order  of 
the  court.  Up  until  such  time  plaintiff  Goodwin  no  doubt  had  control 
of  the  action,  but  after  that  time  he  had  no  'more  control  thereof 
than  plaintiffs  Brosius  and  Goetz.  Cook,  Corporation  (yth  ed.) 
pages  2738-40.  If  the  plaintiffs  Brosius  and  Goetz  rendered  valuable 
services  in  the  matter  of  conserving  and  saving  the  fund  for  the  benefit 
of  all  the  stockholders  of  the  corporation,  no  reason  is  perceived  why 
they  should  not  be  compensated  as  well  as  Goodwin.  In  this  connec- 
tion it  should  be  observed  that  the  amount  of  their  reimbursement  or 
compensation  has  not  been  fixed.  That  is  left  by  the  interlocutory 
decree  to  be  determined  by  the  court  or  referee  after  the  sale  of  the 
property  and  effects  of  the  company,  and  at  the  present  time  neither 
the  plaintiff  Goodwin  nor  any  other  party  interested  has  anything  of 
which  to  complain.  However,  in  view  of  the  fact  that  the  question 
is  presented,  we  think  it  proper  to  say  that  if  the  court  shall  determine 
that  the  plaintiffs  Brosius  and  Goetz  did  render  valuable  services  in 
the  prosecution  of  the  action  and  that  their  efforts  contributed  to  the 
conservation  of  the  fund,  it  is  within  the  power  of  the  court  to  provide 
for  their  reimbursement  in  such  behalf.  No  further  questions  call  for 
consideration. 

By  the  court. — The  interlocutory  decree  is  modified  by  substitut- 
ing sixty  thousand  ($60,000)  dollars,  for  general  damages  as  found  by 
the  referee,  in  lieu  of  thirty  thousand  ($30,000)  dollars  as  determined 
by  the  trial  court,  and  as  so  modified  is  affirmed. 


640  LAW  AND  BUSINESS 

QUESTIONS 

1.  Do  you  understand  from  the  decision  in  the  principal  case  that  the  court 
is  dissolving  the  corporation  in  question  ?     If  so,  under  what  power  is 
the  court  acting  in  doing  so  ?    If  not,  what  is  the  effect  of  the  court's 
decree  ? 

2.  The  D  Company  was  incorporated  with  power  to   manufacture  gas 
and  light  for  the  city  of  X.     For  several  years  the  corporation  has  failed 
and  refused  to  carry  out  its  corporate  undertaking.    What  action  may 
be  taken  against  it  ? 

3.  The  corporation  was  incorporated  with  power  to  manufacture  and  sell 
lumber.     For  several  years  it  has  not  exercised  its  corporate  powers  and 
privileges.    What  action  may  be  taken  against  the  corporation  ? 

4.  The  D  Company  in  excess  of  its  powers  entered  into  a  combination  with 
the  B   Company,  a  rival  corporation.     What  action  may  be  taken 
against  it  ? 

RICHARDS  v.  NORTHWESTERN  COAL  & 
MINING  COMPANY 

221  Missouri  Reports  149  (1909) 

This  suit  was  begun  in  the  circuit  court  of  Macon  County  to 
determine  the  title  to  the  coal  underlying  forty  acres  of  land  situated 
in  said  county.  The  judgment  below  was  to  the  effect  that  neither 
plaintiff  nor  defendant  had  any  estate,  right,  title,  or  interest  in  or 
to  said  coal.  From  that  judgment  both  parties  duly  appealed. 

WOODSON,  J.  It  is  the  contention  of  counsel  for  plaintiff,  that 
upon  the  termination  of  the  bankruptcy  proceedings  in  1878  against 
the  Central  Coal  &  Mining  Co.,  all  of  the  property  thereof  not  dis- 
posed of  by  the  assignee  reverted  to  the  company;  and  that  upon  its 
dissolution  by  limitation,  December  n,  1886,  all  of  its  undisposed-of 
real  property  by  operation  of  law  reverted  to  the  grantor,  John 
Richards,  and  that  upon  the  death  of  the  latter,  the  title  thereto 
passed  to  his  son,  the  plaintiff  herein. 

That  contention  is  most  earnestly  denied  by  counsel  for  defendant; 
and  they  insist  that  under  section  976,  Revised  Statutes  1899,  which 
had  been  in  force  for  many  years  prior  to  the  organization  of  the 
Central  Coal  &  Mining  Co.,  the  coal  in  question  became  vested  in 
the  officers  of  the  company  for  the  purpose  of  paying  the  debts  and 
for  the  use  of  its  stockholders.  Said  section  976  reads  as  follows: 

Upon  the  dissolution  of  any  corporation  already  created,  or  which  may 
hereafter  be  created  by  the  laws  of  this  State,  the  president  and  directors 
or  managers  of  the  affairs  of  said  corporation  at  the  time  of  its  dissolution, 


DISSOLUTION  OF  THE  BUSINESS  UNIT  641 

by  whatever  name  they  may  be  known  in  law,  shall  be  trustees  of  such  cor- 
poration, with  full  powers  to  settle  the  affairs,  collect  the  outstanding  debts 
and  divide  the  moneys  and  other  property  among  the  stockholders,  after 
paying  the  debts  due  and  owing  by  such  corporation  at  the  time  of  its 
dissolution,  as  far  as  such  money  and  property  will  enable  them;  to  sue  for 
and  recover  such  debts  and  property  by  the  name  of  the  trustees  of  such 
corporation,  describing  it  by  its  corporate  name,  and  may  be  sued  by  the 
same;  and  such  trustees  shall  be  jointly  and  severally  responsible  to  the 
creditors  and  stockholders  of  such  corporation  to  the  extent  of  its  property 
and  effects  that  shall  have  come  into  their  hands. 

Plaintiff  insists  that  said  section  has  no  application  to  the  facts 
of  this  case,  for  the  reason  assigned — that  at  the  time  of  the  dissolu- 
tion of  the  Central  Coal  &  Mining  Co.  it  had  no  president,  director, 
or  managers  of  its  affairs,  and  that  he  or  they  could  not,  therefore,  act 
as  trustees  for  said  corporation  in  the  collection  of  its  debts,  or  make 
distribution  of  its  money  and  property  among  its  stockholders. 

There  is  no  evidence  contained  in  this  record  which  tends  to  show 
that  said  corporation  at  the  time  of  its  dissolution  had  no  such  officers 
or  stockholders.  Counsel  for  plaintiff  tries  to  supply  that  omission 
by  insisting  that  the  courts  in  the  absence  of  evidence  must  presume 
that  there  were  none  such.  We  can  indulge  in  no  such  presumption, 
for  the  reason  that  presumptions  of  fact  never  arise  against  the  well- 
known,  usual  occurrences  or  conditions  of  things;  such  a  corporation 
cannot  be  organized  or  exist  without  officers  and  stockholders  and 
common  knowledge  and  experience  teach  us  that  upon  the  dissolution 
of  a  business  corporation,  it  invariably  has  a  president  or  other  chief 
officers,  directors,  and  stockholders.  That  being  true,  the  presumption 
must  be  to  the  contrary,  that  it  did  have  such  officers  and  stockholders. 

But  suppose  we  should  indulge  in  that  presumption,  and  concede 
for  the  sake  of  argument  that  said  section  976  has  no  application,  for 
the  reason  that  there  would  be  no  one  to  collect  and  disburse  the 
corporation's  moneys  and  property,  then  would  plaintiff  be  entitled 
to  maintain  this  action?  While  the  authorities  are  not  uniform 
upon  that  question,  yet  the  overwhelming  weight  thereof  is  against 
plaintiff's  contention,  that  upon  the  dissolution  of  a  corporation  its 
real  property  reverts  to  the  grantor. 

This  court,  speaking  by  JUDGE  NORTON,  said: 

After  the  statement  of  the  doctrine  in  Angell  &  Ames  on  Corporations, 
that  at  common  law,  after  the  civil  death  of  a  corporation,  all  debts 
due  to  and  from  it  are  totally  extinguished,  the  author  adds,  that  "the 


642  LAW  AND  BUSINESS 

rule  of  the  common  law  in  relation  to  the  effect  of  dissolution  upon 
the  property  and  debts  of  a  corporation  has  in  fact  become  obsolete  and 
odious.  Practically  it  has  never  been  applied  in  England  to  insolvent 
or  dissolved  moneyed  corporations,  and  in  this  country  its  unjust  operation 
upon  the  rights  of  both  creditors  and  stockholders  of  this  class  of  corpora- 
tion is  almost  invariably  arrested  by  general  or  special  statute  [McCoy  v. 
Farmer,  65  Mo.  244,  I.e.  249]. 

Thompson  on  Corporations  states  the  rule  as  follows: 

We  have  had  occasion  to  note,  in  passing,  the  principle  of  the  ancient 
common  law  that,  upon  dissolution  of  a  corporation,  its  real  property, 
acquired  by  gift  or  grant  for  corporate  use,  reverts  to  the  donor  or  grantor, 
or  his  heirs;  and  we  have  also  noticed  the  pointed  denial  by  Chancellor 
Kent  that  such  was  ever  the  law  of  England  as  regards  moneyed  corpora- 
tions  Notwithstanding  this  language,  the  author  does  not  believe 

that  a  case  can  be  found,  decided  in  any  of  the  English  courts  within  the 
last  hundred  years,  where  it  was  held  that  land  which  had  been  purchased 
by  an  incorporated  joint-stock  business  company,  for  a  consideration, 
reverted,  on  the  dissolution  of  the  corporation,  to  the  grantor  or  his  heirs; 
or,  where  the  personal  property  of  such  a  corporation,  upon  the  event  of 

its  dissolution,  was  held  to  escheat  to  the  crown The  modern  rule 

then  is,  that,  upon  dissolution,  the  title  to  real  property  does  not  revert  to 
the  original  grantors,  or  their  heirs,  and  the  personal  property  does  not 
escheat  to  the  State,  but  that  both  species  of  property  vest  in  a  receiver 
or  other  trustee;  and  that  all  the  property,  real  and  personal,  of  the  cor- 
poration, is  to  be  administered  by  him  for  the  benefit  of  creditors  and 
stockholders  [5  Thompson  on  Corporations,  sections  6745,  6746], 

The  doctrine  of  rever'ter  is  also  denied  in  the  state  of  New  York. 
JUDGE  RAPALLO,  delivering  the  opinion  of  the  New  York  Court  of 
Appeals,  said: 

In  so  far  as  the  plaintiff's  right  to  recover  in  this  action  is  sought  to  be 
sustained  on  the  ground  that  at  common  law  real  estate  held  by  a  corpora- 
tion at  the  time  of  its  dissolution  reverts  to  the  grantor,  it  cannot  be  sup- 
ported for  two  reasons:  First,  because  the  plank-road  company  has  not 
been  dissolved;  and,  secondly,  because  the  rule  of  law  invoked  by  the 
plaintiff  does  not  prevail  in  this  State  in  respect  to  stock  corporations. 
Under  the  provisions  of  i  R.L.  248,  and  i  R.S.  600,  sections  9  and  10,  upon 
the  dissolution  of  a  corporation,  the  directors  or  managers  at  that  time 
become  trustees  of  its  property  (unless  some  other  custodian  is  appointed) 
for  the  purpose  of  paying  the  debts  of  the  corporation  and  dividing  its 
property  among  its  stockholders;  and  these  provisions  apply  as  well  to 
the  real  as  to  the  personal  property  of  corporations.  Consequently,  where 
lands  are  conveyed  absolutely  to  a  corporation  having  stockholders,  no 


DISSOLUTION  OF  THE  BUSINESS  UNIT  643 

reversion  or  possibility  of  a  reverter  remains  in  the  grantor.  The  convey- 
ances to  the  plank-road  company  in  this  case  appear  to  have  been  absolute 
conveyances — no  condition  or  limitation  of  the  estate  seems  to  have  been 
contained  in  them,  and  they,  therefore,  passed  the  whole  estate  of  4he 
grantor  [Heath  v.  Barmore,  50  N.Y.  302  I.e.  305]. 

And  2  Cook  on  Corporations  (6  ed.)  section  641,  denies  the  doc- 
trine of  reverter  in  the  following  language: 

It  was  formerly  believed  to  be  the  common  law  that  upon  the  dissolu- 
tion of  a  corporation  all  its  assets  belonged  to  the  State,  and  all  its  debts 
were  cancelled,  and  that  the  creditors  were  not  entitled  to  anything  from 
the  assets.  This  remarkable  theory  has  been  stated  and  restated  in  text- 
books and  decisions  of  the  courts  for  over  one  hundred  years.  It  is  found 
in  Blackstone's  Commentaries  and  in  the  old  works  of  Kyd  on  Corporations 
and  Grant  on  Corporations.  The  courts,  however,  while  upholding  the 
rule  theoretically,  have  quite  uniformly  refused  to  apply  such  a  doctrine, 
and  have  invented  various  theories,  fictions  and  arguments  for  avoiding 
this  supposed  doctrine  of  the  common  law.  Finally,  in  1899,  an  English 
court  denied  that  the  common  law  never  countenanced  such  confiscation, 
and  showed  that  in  the  seventeenth  and  eighteenth  centuries  many  corpora- 
tions were  dissolved,  and  that  in  not  a  single  case  was  any  such  doctrine 
applied.  It  again  may  be  said  that,  although  the  common  law  has  its 
reproaches,  this  is  not  one  of  them.  The  American  courts  have  always 
refused  to  follow  the  supposed  common-law  rule  on  this  subject. 

The  Supreme  Court  of  Wisconsin  said: 

The  claim  is  made  ....  that  under  the  common-law  rule  debts  due 
it  or  owing  by  it  are  extinguished,  and  that  its  personal  property  then 
undisposed  of  escheats  to  the  State,  and  its  real  estate  reverts  to  its  grantors 
or  donors.  If  these  propositions  are  well  founded,  the  legal  consequences 
are  certainly  weighty  and  far-reaching,  and  there  should  be  no  uncertainty 
in  their  application  for  the  ascertainment  of  private  property  rights,  and 
of  those  of  the  State  within  their  operation.  True,  there  are  cases  declaring 
that  the  dissolution  of  a  corporation  is  followed  by  such  results,  but  the  trend 
of  modern  adjudications  on  the  subject  disavows  that  such  were  the  doc- 
trines of  the  common  law  as  regards  moneyed  or  commercial  corporations. 
The  result  of  the  adjudications  seems  correctly  and  well  stated  by  Chancel- 
lor Kent.  He  observes:  " The  rule  of  the  common  law  has  in  fact  become 
obsolete  and  odious.  It  never  has  been  applied  to  insolvent  or  dissolved 
moneyed  corporations  in  England.  The  sound  doctrine  now  is,  as  shown 
by  statutes  and  judicial  decisions,  that  the  capital  and  debts  of  banking 
and  other  moneyed  corporations  constitute  a  trust  fund  and  pledge  for  the 
payment  of  creditors  and  stockholders,  and  a  court  of  equity  will  lay  hold 
of  the  fund,  and  see  that  it  be  duly  collected  and  applied"  [Kent,  307, 


644  LAW  AND  BUSINESS 

note].  The  reason  usually  assigned  for  rejecting  the  old  rule  and  holding 
it  inapplicable  is  that  the  rule  had  its  origin  in  a  time  when  corporations 
dealt  almost  exclusively  with  municipal,  ecclesiastical,  and  eleemosynary 
affairs,  and  when  the  modern  business  corporation  was  unknown,  and  that 
the  growth  of  these  moneyed  corporations  necessitated  the  application  of 
principles  which  would  protect  the  private  property  interests  of  persons 
dealing  with  them  under  the  changed  conditions.  To  this  end,  the  rights 
and  interests  in  and  to  the  property  of  business  corporations  are,  in  their 
essentials  and  nature,  considered  to  be  like  those  pertaining  to  partnership 
organizations;  and  when  such  corporation  dissolves,  and  thereby  loses 
legal  capacity  to  preserve  its  estate,  a  court  of  equity  wilt,  if  necessary,  lay 
hold  of  its  assets  to  compel  a  final  liquidation  of  its  affairs,  and  a  distribu- 
tion of  the  capital  among  the  stockholders  as  in  partnership  associations 
[Lindemann  v.  Rusk,  125  Wis.  I.e.  229]. 

We,  therefore,  hold  that  the  so-called  common-law  rule  of  reverter 
is  not  in  force  in  this  state,  and  that  even  in  the  absence  of  said  section 
976  a  reverter  to  the  corporation  would  not  have  taken  place. 

We  are,  therefore,  of  the  opinion  that  the  finding  and  judgment 
of  the  circuit  court  as  to  plaintiff  was  proper. 

QUESTIONS 

1.  When  a  corporation  is  dissolved  in  any  manner,  is  there  any  necessity 
of  giving  notice  of  the  dissolution  to  anyone  ?    If  not,  why  not  ? 

2.  Upon  dissolution  of  a  corporation  what  becomes  of  its  real  property  ? 
its  personal  property  ? 

3.  The  D  Company  is  dissolved,  owing  $5,000  to  P.    What  are  the  rights 
of  P  with  respect  to  this  claim  ? 

4.  The  P  Company  is  dissolved,  having  a  claim  against  D  for  $5,000. 
What  becomes  of  the  claim  ? 

5.  Who  is  charged  with  the  duty  of  winding  up  the  affairs  of  a  corporation 
after  its  dissolution  ? 


TABLE  OF  CASES 


Adair  v.  United  States,  154 

Alabama  Life  Insurance  Co.  v.  Johnston, 

102 

Amicable  Society  v.  Boland,  94 
Andrews'  Heirs  v.  Brown's  Heirs,  299 
Angler  v.  Western  Assurance  Co.,  113 
v.  Silman,  623 


o/  #o//;y  Springs  v.  Pinson,  506 
Benwell  v.  C^y  o/  Newark,  402 
Bergeron  v.  Hobbs,  358 
Boston  Glass  Manufactory  v.  Langdon, 

628 
Soyer  v.  Western  Union  Telegraph  Co., 

260 

Bracken  v.  Kennedy,  305    . 
Brintons  v.  Turvey,  209 
Brown  v.  Winnisimmet  Co.,  441 
Bucksport  6*  Bangor  Railroad  Co.  v. 

Inhabitants  of  Brewer,  394 
Burral  v.  T/fe  Bushwick  Railroad  Co., 

377 

£«r*  v.  Lathrop,  288 
Button  v.  Hoffman,  301 

Cannon  v.  Phoenix  Insurance  Co.,  89 
Castellain  v.  Preston,  137 
Central  Railroad  Co.  v.  Collins,  473 
Challis  v.  London  &•  Southwestern  Rail- 

way Co.,  214 
Charles  River  Bridge  v.  Warrew  Bridge, 

432 
Chicago    6*    Northwestern    Railway    v. 

James,  542 
Chicago,  Pekin  6*  Southwestern  Railroad 

Co.  v.  Marseilles,  453 
Clover,  Clayton  &*  Co.  v.  Hughes,  206 
Coleman  v.  Hagey,  438 
Callings  v.  Allen,  390 
Commonwealth  Insurance  Co.  v.  Sennett, 

129 

Continental  Insurance  Co.  v.  Munns,  68 
Crane  v.  Crane  &  Co.,  10 
Crm/  v.  .Sww  F^re  Oj^ce  o/  London,  36 
Cronin  v.  Vermont  Life  Insurance  Co., 

43 


Danbury  Hatters '  Case,  264 
Decatur  Mineral  Land  Co.  v.  Pa/w,  493 
Dennison  v.  Thomaston  Mutual  Insur- 
ance Co.,  60 

Densmore  Oil  Co.  v.  Densmore,  330 
Dolliver  v.  52.  Joseph  Fire  Insurance  Co., 

116 

Dudley  v.  Kentucky  High  School,  471 
Dunphy  v.  Travelers'  Newspaper  Associ- 
ation, 490 
Duplex  Printing  Co.  v.  Deering,  268 

EasJ  Birmingham  Land  Co.  v.  Dennis, 

411 

Edelstein  v.  Schuler  &•  Co.,  412 
Einstein  v.  Raritan  Woolen  Mills,  372 
Ermentrout   v.   Girard   Fire  Insurance 

Co.,  92 

£vere«  PFa^ey  Co.  v.  Richmond  Typo- 
graphical Union,  232 

Farmers'  &•  Merchants'  Bank  of  Line- 
mile  v.  PFassow,  403 

Farmers'  Loan  6*   TVwsJ  Co.   v.   New 
For&  6*  Northern  Railway  Co.,  479 

Farwell  v.  Boston  6*  Worcester  Railroad 
Corporation,  165 

/*a«^  v.  American  Fire  Insurance  Co., 
in 

Fidelity  Trust  Co.  v.  LeAJgA  Fa//ey  JRa#- 
Co.,  427 

National  Bank  of  Fort  Scott  v. 
Dra&e,  540 

Fletcher  v.  Pullen,  363 

Fotey  v.  Manufacturers'  Fire  Insurance 
Co.,  30 

Foster  v.  White,  520 

Fowler  v.  ^4e/wa  Insurance  Co.,  105 

Franklin  Bank  v.  Commercial  Bank,  456 

Crf66  v.  Philadelphia  Fire  Insurance  Co., 

118 

Gibson  v.  En'e  Railway  Co.,  164 
Gilchrist  v.  Collopy,  516 
Glamorgan   Coal   Co.    v.   50M/& 

Miners'  Federation,  250 
Goodwin  v.  vow  Cotzhausen,  632 


645 


646 


LAW  AND  BUSINESS 


Gress  v.  Knight,  605 
Griffith  v.  Cole  Bros.,  213 
Grosvenor   v.    Atlantic   Fire   Insurance 
Co.,  76 

Guarantee  Trust  &•  Sa/e  Deposit  Co.  v. 
.E.  C.  Z>rew  Investment  Co.,  582 


'j  Sa/e  Co.  v.  Herring-Hall-Marvin 

Safe  Co.,  318 
Hamsmith  v.  £^/>y,  589 
/7awg  v.  Haug,  337 
Heller  v.  National  Marine  Bank,  612 
Hendren  v.  Wing,  293 
Hibblewhite  v.  McMorine,  13 
Hicks  v.  British  America  Assurance  Co., 

22 

H  olden  v.  Hardy,  159 
Hospes  v.  Northwestern  Manufacttmng 

&•  Car  Co.,  597 

Hudson  Real  Estate  Co.  v.  Tower,  386 
v.  Cary,  553 

.  Roberts,  Throp  &•  Co.,  422 
Hutchinson  v.  Green,  536 

Johnson   v.   Berkshire   Fire  Insurance 

Co.,  86 

Johnston  v.  Dutton,  467 
Johnston  v.  Fargo,  150 
Jones  v.  Faw  Winkle  Gin  6*  Machine 

Works,  236 


v.  Brewington,  503 
Kemp  v.  Division  No.  241,  223 
Kimball  v.  Aetna  Insurance  Co.,  65 
Kirkpatrick  6*  Lyons  v.  Bonsall,  15 

Lams  on  v.  American  Axe  &  Tool  Co., 
177 

Lawlor  v.  Loewe,  264 

£e#fer  v.  IMca,  529 

Lemon  v.  Phoenix  Mutual  Life  Insur- 

ance Co.,  80 
Liverpool    Insurance     Co.     v.     Mass- 

achusetts, 285 

Lowg  v.  Georgia  Pacific  Railway  Co.,  458 
Lumley  v.  Cye,  217 

Me  Arthur  v.  Times  Printing  Co.,  327 

Jlf  a/or  v.  Hawkes,  534 

Mallory  v.  Hanaur  Oil  Works,  465 

Afaww  v.  O'  Sullivan,  172 

Mason  v.  Eldred,  308 


Master  Stevedores'  Association  v.  Walsh, 

217 

Jlf*//er  v.  Ewer,  512 
Mitchell  v.  ^eea7,  567 
Monument    National    Bank    v.    G7o6e 

Worfo,  450 

Morton  Gravel  Road  Co.  v.  Wysowg,  505 
Mutual    Life    Insurance    Co.    of   New 

York  v.  Allen,  70 

New  For&  Cew*ra/  Railroad  Co.  v.  WA/te, 
190 

Nicoll  v.  A^ew  For&  6"  £m  Railroad  Co., 
436 

Nims  v.  Mount  Herman  Boys'  School, 
575 

Nisbet  v.  Rayne  &  Burn,  208 

Norfolk  &  Western  Railroad  Co.  v. 
Hoover,  186 

Northern  Trust  Co.  v.  Columbia  Straw- 
Paper  Co.,  380 

Northside  Street  Railway  Co.  v.  TFor/A- 
ingtow,  445 

Oshkosh  Gas  Light  Co.  v.  Germania  Fire 
Insurance  Co.,  133 

Paducah  6*  Memphis  Railroad  Co.  v. 

Par&s,  397 
Parkinson    Co.     v.    Building     Trades 

Council,  254 
Parsons  v.  Joseph,  499 
Patterson  v.  Mutual  Life  Insurance  Co., 

96 
Pennsylvania    Mutual    Life    Insurance 

Co.  v.   Mechanics  Savings  Bank  &° 

7rw.y/  Co.,  52 
People  v.  Fora7,  344 
Phoenix   Fire   Insurance   Co.    v.    .Em 

Transportation  Co.,  135 
fVaw/  v.  Macon  Oil  &  Ice  Co.,  475 
Pooley  v.  Whitmore,  524 
Pra//  v.  Bacon,  284 
Proudfoot  v.  Montefiore,  57 
Pw/'u  v.  Robison,  83 

Richards  v.  Northwestern  Coal  &°  Mining 

Co.,  640 

Richmond  6°  Danville  Railroad  Co.  v. 
,  183 

v.  Sww/A,  46 
Robinson  Bank  v.  Miller,  369 
Rodgers  v.  Meranda,  592 


TABLE  OF  CASES 


647 


Rothchild  v.  Memphis  &  Charleston  Rail- 

road Co.,  549 
Ruse  v.  Mutual  Benefit  Life  Insurance 

Co.,  26 

Sanborn  v.  Royce,  590 

Saunders  v.   Eastern  Hydraulic  Brick 

Co.,  181 

Schwab  v.  Potter  Co.,  486  . 
Shea  v.  Donahue,  625 
•SwJ/A  v.  #wr<f,  545 
Smith  v.  Mechanics1  Fire  Insurance  Co., 

108 
Smith   v.    San   Francisco   &   Northern 

Pacific  Railway  Co.,  415 
Society  Perun  v.  City  of  Cleveland,  350 
Sodiker  v.  Applegate,  340 
Solomon  v.  Kirkwood,  619 
So/J  v.  Williams  port  Radiator  Co.,  178 
Spangler  v.  Indiana  &  Illinois  Central 

Railway  Co.,  382 

v.  Lehigh  Valley  Railroad  Co.,  578 


v.  Butterfield,  531 
Taylor  v.  Fanning,  608 
Taylor  v.  Howard,  18 
Terlecki  v.  Strauss,  210 


Thompson  v.  Blaisdell,  412 
Thrasher  v.  Pi&e  County  Railroad  Co., 
388 

United  States  v.  Milwaukee  Refrigerator 
Transit  Co.,  321 


e/e  v.  Germania  Insurance  Co.,  121 

Wainer  v.  Milford  Mutual  Fire  Insur- 

'ance  Co.,  33 
Wainwright  v.  P.  #.  6*  /?.  If.  #00/s 

Co.,  562 
Warren   v.   Davenport   Fire   Insurance 

Co.,  38 
W'es/    Nashville    Planing-Mill    Co.    v. 

Nashville  Savings  Bank,  407 
JWte  v.  Eiseman,  289 
Whitehead  v.  Reader,  211 
PF/«Vwe;y  Arms  Co.  v.  Barlow,  460 
Willcutt  &•  S<ws  Co.  v.  Driscoll,  240 
Willmott  v.  London  Road  Car  Co.,  314 
Wood  v.  American  Fire  Insurance  Co., 

297 
Woodward  v.  McAdam,  295 


v.  South  Birby  Collieries,  204 


INDEX 


[Figures  refer  to  pages.     C  and  CC  refer  to  "case  or  cases  beginning  on  page 
or  pages,"  as  CC  423,  425  means  cases  beginning  on  pages  423  and  425.] 


Accident,  CC  206,  208,  209,  210,  211, 

213,  214 
Assumption  of  risk  by  servant,  doctrine 

of,  CC  164,  165,  177,  181,  186,  197, 

top 

Blacklisting  of  employees,  C  260 
Boycott,  CC  254,  264 
Liability  of  members  of  union  for, 

C  264 
Primary   and    secondary,   discussed, 

C  268 

Business   relations,    interference   with, 
C  217(1) 

Clayton  Act: 

Effect  of,  on  injunction,  C  268 

Effect  of,  on  labor   combinations,    C 

268 

Collective  bargaining,  CC  217  (2),  223 
Combination  of  laborers: 

Lawful  objects,  CC  217  (2),  223 

Means  available  to  enforce,  CC  217 
(2),  236,  240 

To  maintain  price  of  labor,  C  217  (2) 
Competitive   labor    practices,   law   of, 

governing,  2171!. 

Concealment,  see  Insurance  contracts 
Conditions,  see  Insurance  contracts 
Conspiracy  discussed,  CC  217  (2),  260 
Contract  of  employment,  CC  150,  154, 

i59 
Contract    to    sell,    distinguished    from 

gambling  contract,  CC  13,  15,  18 
Contributory  negligence,    doctrine   of, 

CC  177,  178 
Corporations : 

Abuse  of  power  by,  as  distinguished 
from  doing  unauthorized  act  by, 

C45° 
Acts  of,  as  distinguished  from  act  of 

members,  CC  301,  318,  321 

Invalid  when,  CC  512,  556 
Agreement  of  shareholders  to  vote  as 

unit,  C  145 

As  a  person,  CC  301,  314,  318,  321 
Bondholders'  rights  against,  C  380 
Bonds  of,  transfer  of,  CC  402,  412  (i) 
Bonus  stock,  liability  of  holder  of, 

to  creditors  of  corporation,  C  597 


Corporations,  cont.: 

By-laws  may  be  made  by  whom,  CC 

505  >  506 
Common  law  powers  of,  CC  436,  438, 

441,  445,  450,  453,  456 
Conditional    subscription    to    stock, 

CC  386,  390,  394,  397 
Control  of,  by  whom,  CC  505,  506 
Courts  open  to  minority  shareholders 

of,  when,  CC  490,  493,  499 
Created  how,  CC  350,  358 
Creditors  of,  position  of,  CC  597,  605, 
612 

When  also  directors,  C  608 
Creditors'  rights  against  shareholders 

of,  C  597 

Dejure  and  de  facto,  CC  344,  350,  358 
Directors: 

Acts    of,    contrary    to    wishes    of 
majority  of  shareholders,  C  536 
Must  be  done  how,  C  540 
As  creditors  of,  C  608 
Duties  of,  CC  422,  479,  493,  536, 

540,  545,  553,  562 
Elected  how,  C  516 
Hold  office  by  virtue  of  what,  C  516 
Meeting  of: 

Held  where,  C  512 
Necessity  for,  C  540 
Powers  of,  C  536 

As  to  management,  CC  553,  562 
To  deal  with  themselves,  C  562 
Relation  to  corporation,  CC  422, 


553,  562 
ela 


Relation  to  creditors  of  corpora- 

tion, C  608 
Relation  to  shareholders,  CC  422, 

545 
Validity  of  acts  of  persons  acting 

as,  C  516 
Dissolution: 

Disposition  of  property  upon,  C  640 
Majority's  right  to  effect,  C  632 
Occasions  for,  C  628 
Rights  of  members  upon,  CC  612, 

632 

Rights  of  minority  upon,  C  632 
What  constitutes,  C  628 
Distinguished  from  owners  of  stock, 
C3oi 


649 


650 


LAW  AND  BUSINESS 


Corporations,  cont.: 
Dividends,  CC  422,  427;  see  Corpora- 
tions, Shareholders 
Illegal,  C  490 
Doctrine  of  implied  powers,  CC  432, 

441,  445,  450,  453 
Features  of,  C  285 
Formed  how,  CC  285,  344,  344  note 
Implied  powers,  how  found,  CC  432, 

436,  438,  441,  445,  450,  453 
Legal  status  of,  CC  301,  314,  318,  321 
Liability  of,  for  contracts  made  by 

promoters,  CC  327,  330 
Liability  of  stockholders  to,  C  380 
Lien  of,  against  shares,  C  506 
Majority  powers,  CC  471,  479,  632 
Of   shareholders   in   management, 

C4I2(2) 

To  dissolve,  C  632 
Members'  rights  against  directors,  C 

545 
Minority    shareholders'    rights    and 

powers,  CC  372,  471,  473,  475,  486, 

490,  493,  499,  632 
Nature  of,  CC  284,  285 
Necessity      for      compliance      with 

statutes  in  organization  of,  CC  344, 

35°.  358 
Powers  of,  effect  of  exceeding,  CC 

458,  460,  465 

General,  C  486 

How   determined,    CC    432,    436, 
438,  441,  445,  450,  453 

To  dispose  of  property,  C  475 

To  hold  stock  in  another  corpora- 
tion, CC  456,  473 

To  make  contracts  of  partnership, 

465  note 

Powers  of  officers  of,  C  542 
Preferred  shareholders  of,  relation  of, 

to  creditors,  C  612 
Preferred  stock  in,  dividends  on,  C 

427 
Promise  to  subscribe  to  stock  of,  C 

386,  388 

Promoters'  relation  to,  CC  327,  330 
Property  of,   belongs   to   whom   on 

dissolution,  C  640 

Distribution  of,  on  dissolution,  C 
640 

Title  to,  in  whom,  C  549 
Proxy  vote  in  shareholders'  meeting, 

CC4i2  (2),  415 
Quorum    of    shareholders'   meeting, 

C5i6 

Receivers,  discussed,  C  597 
Refusal   by,    to   transfer   on   books, 

transferred  stock,  C  456 
Reorganization  of,  C  486 
Responsibility  for  crimes,  C  578 


Corporations,  cont.: 

Responsibility  for  torts,  C  375 
Rights   of,   against   shareholders,    C 

506 
Rights  of  members  in  management, 

C  520 
Rights    of    minority,    C    632;     see 

Minority  shareholders,  supra 
Rights  of,  to  dispose  of  property,  C 

438,  445 

Securities  of ,  kinds  of,  CC  402,  412  (i) 
Share  of  stock  in,  what  is,  C  377 
Shareholder  estopped  to  attack  acts 

of,  when,  C  499 
Shareholders : 

Liability  to  creditors,  for  unpaid 
stock,  C  597 

Relation  to  corporation,  C  605 

Relation  to  creditors  of  corpora- 
tion, C  605 

Relation  to  each  other,  C  605 

Relation  to  property  of,  C  549 

Rights    against    corporation,    CC 

473,  475 

Rights  on  dissolution,  CC  632,  640 
Rights  to  dividends,  CC  422,  427 

Shares  of  stock,  transferred  how,  C 
403 

Stock,  fraudulent,  C  499 

Stock,  may  be  dealt  with,  how,  by, 

C377 

May  be  increased  how  and  when, 

C372 
Purchased  by  corporation  in  itself, 

C.453 

Transfer  of,  C  411 

Effective  when,  C  403 
Subscribers,  liability  of,  CC  382,  386, 

388,  390,  394,  397 

Right  to  rescind  contract  of  sub- 
scription, C  605 
Subscription  on  condition,  CC  386, 

390,  394,  397 

Subscription  on  special  terms,  C  397 
Transfer  of  bonds  of-,  CC  402,  412  (i) 
Transfer  of  shares  in,  CC  377,  403, 

411,  506 

Completed  when,  C  412  (2) 
Transferee  of  stock  not  fully  paid  up, 

position   of,   and   liability   of,   for 

remainder,  C  407 
Trust  fund  doctrine,  C  597 
Ultra  vires: 

Acts,  CC  458,  486 

Contracts,  CC  458,  460,  465 
Unpaid    stock,    shareholders'  liabil- 
ity to    corporation    creditors    for 

amount  of,  C  597 

Who  has  title  to  property  of,  C  301 
Who  may  attack  existence  of,  C  350 


INDEX 


651 


Corporations,  coni.: 
Who  may  vote  in  shareholders'  meet- 
ing, €412  (2) 

Damnum  absque  injuria,  225 
Discharge  of  employee  for  joining  union, 

Ci54 
Due  process  of  law,  147,  C  190 

Employer,  duty  of,  to  other  employers' 
C  217(1) 
Duty  of,  to  employees: 

To  provide  safe  place  for  work, 

CC  177,  181 

To  use  ordinary  care,  C  150 
To  use  ordinary  care  in  selection  of 
fellow-servants,  CC  165,  171,  186 
To  provide  reasonably  safe  equip- 
ment, C  182 
Liability  of,  for  injury  done  to  third 

person  by  servant,  186 
Liability  of,  for  injury  to  servant, 
CC  150  and  164-214 
As  affected  by  legislation,  190-214 
Employment,    interference    with    con- 
tracts of,  C  217  (i) 
Relation  of,  see  Master  and  Servant, 

infra 

Some  problems  of,  as  affected  by  law, 
145-49 

Fellow-servant,  defined,  C  172 
Fellow-servant  rule,  CC  165,  172,  186 
Financing  of  business  unit,  see  Table  of 

Contents 
Form  of  business  unit,  see  Table  of 

Contents: 

Questions  arising  in  connection  with, 

281  ff. 

Fraud,  see  Insurance,  contracts  of 
Freedom  of  contract,  146,  147,  C  217  (i) 

Limited  how,  CC  150,  154,  159 

Gambling    contracts,    not    enforcible, 

why,  5 

What  constitutes,  6,  CC  15,  18 
Hours  of  labor  laws,  constitutionality 

of,  C  159 

Inducement  of  breach  of  contract,  C  250 

Injunction : 

Affected  by  Clayton  Act,  C  268 
Protects  what,  148,  149 
Use  of,  in  labor  disputes,  CC  223, 
232,  236,  240,  250,  254,  260,  266 

Injury,  "arising  out  of  and  in  the  course 
of  employment,"  CC  204,  206,  208, 
209,  210,  211,  213,  214 

Insurable  interest,  see  Insurance,  con- 
tracts of 

Insurance  agents,   general  powers  of, 

C  121 


Insurance,  contracts  of: 

Against  fire,  covers  what  risks,  CC 
86,  89,  92 

Against  loss  of  life,  covers  what  risks, 
CC  94,  96 

Amount  of  recovery  under,  CC  129, 
133 

In  life  insurance,  C  46 
In  property  insurance,  C  30 

Assignment  of  fire  policies,  CC  68 

Assignment  of  life  policies,  C  70 

Beneficiaries  of,  CC  76,  80,  83 

Change  of  interest,  effect  of,  on,  C  1 18 

Concealment  in,  CC  52,  57 

Conditions  in,  CC  in,  113,  118,  121, 

116 
As  to  ownership,  interpreted,  CC 

116,  118 

Interpreted  how,  Cm 
May  be  waived,  how,  C  121 
Not    breached    by    negligence    of 

insured,  C  113 
Of  notice  of  loss,  effect  of  breach  of, 

C  92 
Waiver  of,  C  121 

Contract  of  indemnity,  CC  129,  135, 
137 

Creditors'  rights,  as  against  benefici- 
ary of  life,  C  83 

Death  by  legal  execution,  effect  of, 
on  life  policy,  C  94 

Devices  for  shifting  risks,  9 

Direct  results  of  fire  covered  by,  CC 
89,92 

Effect  of  payment  under,  when  no 
loss,  C  137 

Formation  of,  C  22 

Fraud,  effect  of,  on,  C  96 

Insurable  interest  gives  right  of  re- 
covery for  how  much: 
In  life  insurance,  C  46 
In  property  insurance,  C  30 
Necessary  to  validity  of  policy,  CC 

26,  30,  33,  36,  38,  43,  46,  76 
What  is: 
In  fire  insurance,  CC  30,  33,  36, 

3? 
In  life  insurance,  CC  43,  46 

Insurer's  right  to  subrogation  after 
payment  under,  CC  135,  137 

Misrepresentation  in,  CC  60,  65 

Negligence  of  insured,  effect  of,  on 
fire  policies,  CC  86,  113 

Open  and  valued,  CC  129,  133 

Operation  of,  68  ff. 

Opinion  in,  C  60 

Promises  in,  distinguished  from  repre- 
sentations, C  65 

Representations  in,  effect  of,  C  102 


652 


LAW  AND  BUSINESS 


Insurance,  contracts  of,  conl.: 

Risks  covered  by: 

Against  loss  by  fire,  CC  86,  89,  92 
Against  loss  of  life,  CC  94,  96 

Statutes,  effect  of,  CC  22  and  133 

Subrogation  incident  to,  CC  135,  137 

Suicide,  effect  of,  on  life  policy,  C  96 

Valued  policy,  C  133 

Vested  interest  in,  C  80 

Warranties  in: 

Distinguished  from  representation, 

CC  102,  107 

Effect  of  breach  of,  CC  102,  105 
Effect  of  materiality  on,  CC  102, 

IOS 

Must  be  strictly  complied  with,  CC 
102,  105 

Not  found  by  construction,  C  102 

What  are,  CC  102,  105 
Who    may    make,    as    insured,    see 

Insurable  Interest 
Who  may  recover  on,  CC  76,  80,  83 
With  more  than  one  company,  on 

same  property,  effect  of,  C  133 
Writing  not  required,  C  22 

Labor  combinations  as  affected: 
By  Clayton  Act,  C  268 
By  Sherman  Act,  C  254 

Labor  combinations  as  violation  of  anti- 
trust laws,  CC  264,  268 

Labor  problems,  as  affected  by  law, 
145-278;  see  Table  of  Contents, 
Boycott,  Employment,  Injunction, 
Strikes,  etc. 

Labor  unions,  see  Labor  problems, 
supra 

Right    of    non-union    man    against, 
because  of  being  kept  from  work, 

C223 

Legislative  control  of  employment  rela- 
tion, 147  ff. 

Master  and  servant,  common  law  of, 
inadequate,  146,  147 

Master's  liability  for  servant's  acts,  147 

Master's  liability  to  servants,  146,  147; 
see  Assumption  of  risk;  Contributory 
negligence,  Fellow-servant  rule; 
Workmen's  Compensation  Acts; 
Risks  of  employment 

Misrepresentations,  see  Insurance  con- 
tracts 

Mutuality,  effect  of  want  of,  on  agree- 
ment, C  10 

Negligence,  see  Master  and  servant; 
Workmen's  Compensation  Acts 


Partnership : 

Acts    of    members    binding    on    all 
members  of,  when,  CC  524,  529, 

53 i »  534 

Association  not,  when,  C  288 
Basis  of,  C  337,  340 
By  estoppel,  C  363 
Control  of,  how  distributed,  C  503 
Created  how,  CC  284,  288,  337,  340, 

363 
Creditors'  rights  against,   589,   590, 

592 

Debts  of,  property  available  to  sat- 
isfy, CC  589,  590,  592 
Dissolution,  distribution  of  property 

upon,  C  625 

Effect  of,  general,  C  534 

On  liability  of  member,  C  623 

Effected  how,  C  619 

Notice  of,  C  619 

Rights  of  members  upon,  C  625 
Distribution  of  assets  on  dissolution, 

C  625,  C  299 
Duty  of  members  to  each  other,  CC 

3°5>  567 
Effect  on,  of  death  of  member,    C 

299 

Formation,  CC  284,  288,  337,  340 
General  powers  of,  C  524 
Liability  of  members  of,  for  debts  of, 

.C.3°8. 
Limitations  of  powers  of,  C  289 

Limited,  C  289 

Majority  powers,  C  467 

Members  of,  fiduciary  relation  of,  to 

each  other,  C  330 
Members  of,  liability  of,  as  affected 

by  dissolution,  C  623 

Liability    of,    for    acts    of    other 
members,  when,   CC   524,   529, 

S3i,  534 
Power  to  enrich  selves,  at  expense 

of  firm,  C  567 
Responsibility  of,  for  debts  of  firm, 

CC  589,  590,  592 
Rights  of,  C  592 
Minority  powers,  C  467 
Powers  of,  CC  295,  297 
Properity  of,  what  is,  C  369 
Responsibility  of,  for  torts,  C  582 
Rights  of  members  as  to  each  other, 

C305 
Rights  of  members  in  management, 

Sale  of  goods  to,  by  one  member  of, 

C33Q 
Share  of  members  in  management  of, 

C467 
Transfer  of  share  in,  effect  of,  C  297 


INDEX 


6S3 


Partnership,  cont.: 
•Who  has  title  to  property  of,   CC 

297,  299 
Who  responsible  for  debts  of,   CC 

589,  590,  592 

Property  rights  protected  by  the  con- 
stitution, CC  154,  159 

Risks,  see  Table  of  Contents 

Classified,  3 

Contracts  for  shifting,  distinguished 
from  gambling  contracts,   5 

Contracts  sole  legal  device  for  shift- 
ing, 8 

Defined,  3,  5 

Devices  for  shifting,  considered,  CC 
10  ff. 

Soundness  of  policy  of  shifting,  5-8 
Risks  of  employment 

As  affected  by  modern  legislation,  CC 
190,  204-14 

Assumed   by  employee  at  common 
law,  CC  164,  165,  172,  177,  178 

Not  assumed  by  employee  at  com- 
mon law,  CC  150,  181,  182,  186 

Safe  equipment,  what  is,  C  183  see 
Employment 

Sherman  Act,  effect  of,  on  labor  com- 
binations, C  264 


Speculative     contracts,     distinguished 

from    gambling    contracts,    CC    13, 

iS,  18 
Statutory    changes    necessary    as    to 

master  and  servant  relations,  146— 
Stock,  see  Corporations 
Stockholders,  see  Corporations 
Strikes: 

By  men  under  contract,  C  250 

Illegal    means    to    effect,    does    not 
make  whole  strike  bad,  C  240 

Legality  of,  C  223,  232 

Means  used  to  perpetuate,  C  236 

Objects  of,  C  232 

Purposes  of,  lawful  and  unlawful,  CC 
223,  232,  236,  240 

Sympathetic,  CC  240,  268 

Subrogation,    see    Insurance,     con- 
tracts of 

Waiver  of  condition,  see  Insurance 
Workmen's  Compensation  Act; 
Accident,  what  is,  under,  CC  204, 

206,  210,  211,  213,  214 
Compensable  injuries  under,  CC  204, 

206,  208,  209,  210,  211,  213 
Constitutionality  of,  C  190 
Injury,  what  is,  under,  CC  204,  206, 
208,  209,  210,  211,  213,  214 


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